**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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**FORM 20-F/A**

 

**Amendment No. 2**

** **

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** **

**(Mark One)**
| **o**      | ** ** | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                  |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| **x**      | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **For  the fiscal year ended December 31, 2006**                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| **o**      | ** ** | **SHELL  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **Date of event requiring this  shell company report**                                                                                                                                                                                                              |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **For  the transition period from                      to                    ** |

 

**Commission File Number: 001-32692**

 

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**Patni Computer Systems Limited**

(Exact name of registrantas specified in its charter)

 

**Not applicable**

(Translation ofregistrant’s name into English)

** **

**Republic of India**

(Jurisdiction of incorporation or organization)

** **

**Akruti Softech Park,MIDC Cross Road No. 21**

**Andheri (E), Mumbai 400093, India**

**+91 22 6693 0500**

(Addressof principal executive offices)

 

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**Securities registered or to be registered pursuant to Section 12(b) ofthe Act:**

** **

| **Title of each class:**                                                                                                                | ** ** | **Name of each exchange  on which registered:** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|
| American  Depositary Shares, each representing two equity shares, par value Rs. 2 per  share. Equity shares, par value Rs. 2 per share* | ** ** | New  York Stock Exchange                        |

 

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*** Not for trading but only inconnection with Registration of the ADSs**

 

Securities registeredpursuant to Section 12(g) of the Act:

**None**

** **

Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act:

**Not applicable**

 

**The number of outstanding shares of each of the issuer’sclasses of capital or common stock as of December 31, 2006 was:**

**Equity shares:**  **138,281,853**

** **

**Indicate by check markif the registrant is a well-known seasoned issuer, as defined in Rule 405**

**of the Securities Act of1933, or the Securities Act.**

YES   o      NO   x

** **

**If this report is anannual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

YES   o        NO   x

 

Note—Checking the boxabove will not relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 from their obligationsunder those Sections.

 

**Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**

Yes   x        No   o

** **

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):**

 
| Large  accelerated filer    o | Accelerated  filer    x | Non-accelerated  filer     ̈ |
|---------------------------------------------------|---------------------------------------------|------------------------------------------------------|

 

**Indicate by check markwhich financial statement item the registrant has elected to follow.**

Item 17   o        Item18   x

** **

**If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).**

YES   o        NO   x

 

 

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**ExplanatoryNote**

 

This Amendment No. 2on Form 20-F/A to our Annual Report on Form 20-F for the fiscal yearended December 31, 2006 is being filed for the purposes of supplementingor amending Note 10 of our consolidated financial statements and including thesigned accountants’ report, as set forth below.

 

**PART III**

 

**ITEM 17. FINANCIAL STATEMENTS**

 

See Item 18.

 

**ITEM 18. FINANCIAL STATEMENTS**

 

The following financialstatement and auditors report for fiscal 2006 are incorporated herein byreference and are included in this Item 18 of this report on Form 20-F:

 

·       Report ofIndependent Registered Public Accounting Firm.

 

·       ConsolidatedBalance Sheets as of December 31, 2005 and 2006.

 

·       ConsolidatedStatements of Income for the years ended December 31, 2004, 2005 and 2006.

 

·       ConsolidatedStatements of Stockholders Equity and Comprehensive Income for the years ended December 31,2004, 2005 and 2006.

 

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2005 and2006.

 

·       Notes to theConsolidated Financial Statements.

 

**ITEM 19. EXHIBITS**

 
| *1.1  |   | Articles of Association  of Patni Computer Systems Limited, as amended                                                                                     |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *1.2  |   | Memorandum of  Association of Patni Computer Systems Limited, as amended                                                                                   |
| *1.3  |   | Certificate of  Incorporation of Patni Computer Systems Limited, as amended                                                                                |
| *2.1  |   | Form of Deposit  Agreement                                                                                                                            |
| *2.2  |   | Patni’s specimen  certificate for equity shares                                                                                                       |
| *2.3  |   | Form of American  Depositary Receipt                                                                                                                  |
| *2.4  |   | Patni ESOP  2003-Revised 2006 #                                                                                                                            |
| *4.2  |   | Registration Rights  Agreement                                                                                                                             |
| *4.3  |   | Purchase Agreement  between Patni Computer Systems Limited and Cymbal Corporation dated November 3,  2004                                             |
| *4.4  |   | Lease Deed entered  into between the Company and State Industrial Promotion Corporation of Tamil  Nadu Limited (SIPCOT), dated September 30, 2004     |
| *4.5  |   | Service Agreement  between Patni Computer Systems Inc. and Mr. Narendra K. Patni dated  December 1, 2000, as amended                             |
| *4.6  |   | Consultancy Agreement  between Patni Computer Systems Limited and Patni Computer Systems Inc. (f/t/a  Data Conversion Inc.) dated October 27, 2000    |
| *4.7  |   | Terms of employment  for Mr. Gajendra K. Patni and Mr. Ashok K. Patni                                                                  |
| *4.8  |   | Information Technology  Services Agreement between General Electric International Inc. and Patni  Computer Systems Inc. dated November 12, 2003       |
| 4.9   |   | Amendment to  Information Technology Services Agreement between General Electric  International Inc. and Patni Computer Systems Inc. dated August 03, 2006 |
| ##8.1 |   | List of subsidiaries  of the Registrant, see “Item 4. Information on the Company—Organizational  Structure”                                 |
| 12.1  |   | Certification of Chief  Executive Officer under Section 302 of the Sarbanes Oxley Act                                                                 |
| 12.2  |   | Certification of Chief  Financial Officer under Section 302 of the Sarbanes Oxley Act                                                                 |
| 13.1  |   | Certification of Chief  Executive Officer under Section 906 of the Sarbanes Oxley Act                                                                 |
| 13.2  |   | Certification of Chief  Financial Officer under Section 906 of the Sarbanes Oxley Act                                                                 |

 

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*                    Previouslyfiled on November 17, 2005 with the SEC on Form F-1 (File Number333-129771)

 

#                    Incorporatedby reference from Form S - 8 (file number 33-137306) 

 

##             Previouslyfiled on June 29, 2007 with the SEC on Form 20F (File Number 001-3269207948644)

 

2

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**SIGNATURES**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-F/Aand that it has duly caused and authorized the undersigned to sign thisAmendment No. 2 on Form 20-F/A on its behalf.

 
|                           | For Patni Computer  Systems Limited |
|---------------------------|-------------------------------------|
|                      |                                |   |
|                      | By:                                 | /s/ NARENDRA K. PATNI |
|                      |                                | Narendra K. Patni |
| * *                  | * *                            | *Chief Executive Officer* |
| * *                  | * *                            | * * |
|                      | For Patni Computer  Systems Limited |
|                      |                                |   |
|                      | By:                                 | /s/ SURJEET SINGH |
|                      |                                | Surjeet Singh |
| * *                  | * *                            | *Chief Financial Officer* |
| Mumbai, India             |                                |   |
| Date: March 04, 2008 |                                |   |

 

3

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**Patni Computer Systems Limitedand subsidiaries**

 

**Consolidated financial statements**

 

**Contents**

 
| Report  of Independent Registered Public Accounting Firm                                                                                  |   | F-2          |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|
|                                                                                                                                      |   |         |
| Consolidated  Balance Sheets as of December 31, 2005 and 2006                                                                        |   | F-3          |
|                                                                                                                                      |   |         |
| Consolidated Statements of Income for the years ended  December 31, 2004, 2005 and 2006                                              |   | F-4          |
|                                                                                                                                      |   |         |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for the years ended December 31, 2004, 2005 and  2006 |   | F-5  to F-6  |
|                                                                                                                                      |   |         |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2004, 2005 and 2006                                          |   | F-7  to F-8  |
|                                                                                                                                      |   |         |
| Notes to the Consolidated Financial Statements                                                                                            |   | F-9  to F-36 |

 

F-1

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** **

Report of IndependentRegistered Public Accounting Firm 

** **

TheBoard of Directors and Shareholders Patni Computer Systems Limited 

 

Wehave audited the accompanying consolidated balance sheets of Patni ComputerSystems Limited and subsidiaries (‘the Company’) as of December 31, 2006and 2005, and the related consolidated statements of income, shareholders’equity and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2006. These consolidated financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements based onour audits. 

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion. 

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Patni ComputerSystems Limited and subsidiaries as of December 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles.

 

Asdiscussed in Note 2.1.27 to the consolidated financial statements, effectiveJanuary 1, 2006, the Company adopted the fair value method of accountingfor stock-based compensation as required by Statement of Financial AccountingStandards No. 123(R), Share- Based Payment.

 
| 21 February 2007 |   |
|----------------------------|--------|
|                       |   |
| /s/ KPMG                   |   |
| KPMG                       |   |
| Mumbai, India              |   |

 

 

F-2

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**Patni Computer Systems Limited and subsidiaries**

**Consolidated Balance Sheets**

 
| **As of**                                                                                                                                                                               | ** ** | **December 31,  2005** | ** **      | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-----------------|-----------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| **Assets**                                                                                                                                                                              | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| *Current assets*                                                                                                                                                                        | * *   | * *                    | * *        | * *                    | * *   |
| Cash and cash  equivalents                                                                                                                                                              |       | $                           | 148,819,600     |                        | $          | 46,510,010 |   |
| Investments                                                                                                                                                                             |       | 141,775,935                 |            | 242,968,048                 |       |
| Accounts receivable,  net                                                                                                                                                               |       | 58,747,671                  |            | 101,893,834                 |       |
| Accounts receivable  from a significant shareholder, net                                                                                                                                |       | 15,673,490                  |            | 13,724,670                  |       |
| Costs and estimated  earnings in excess of billings on uncompleted contracts                                                                                                            |       | 26,094,094                  |            | 22,834,345                  |       |
| Deferred income taxes                                                                                                                                                                   |       | 13,722,884                  |            | 10,240,528                  |       |
| Prepaid Expenses                                                                                                                                                                        |       | 2,051,035                   |            | 2,155,676                   |       |
| Other current assets                                                                                                                                                                    |       | 7,498,001                   |            | 9,860,763                   |       |
| **Total current assets**                                                                                                                                                                | ** ** | **414,382,710**             | ** **      | **450,187,874**             | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| Deferred income taxes                                                                                                                                                                   |       | 3,401,766                   |            | 370,529                     |       |
| Investments                                                                                                                                                                             |       | —                      |            | 3,048,092                   |       |
| Other assets                                                                                                                                                                            |       | 9,711,827                   |            | 11,457,225                  |       |
| Property, plant and  equipment, net                                                                                                                                                     |       | 88,244,547                  |            | 125,757,824                 |       |
| Intangible assets, net                                                                                                                                                                  |       | 10,158,065                  |            | 9,687,443                   |       |
| Goodwill                                                                                                                                                                                |       | 27,987,198                  |            | 39,831,664                  |       |
| **Total assets**                                                                                                                                                                        | ** ** | **$**                       | **553,886,113** | ** **                  | **$**      | **640,340,651** | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| **Liabilities and shareholders’  equity**                                                                                                                                          | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| *Current liabilities*                                                                                                                                                                   | * *   | * *                    | * *        | * *                    | * *   |
| Capital lease  obligation                                                                                                                                                               |       | 289,520                     |            | 301,138                     |       |
| Trade accounts payable                                                                                                                                                                  |       | 5,488,043                   |            | 11,010,564                  |       |
| Billings in excess of  costs and estimated earnings on uncompleted contracts                                                                                                            |       | 2,350,346                   |            | 3,324,581                   |       |
| Income taxes payable                                                                                                                                                                    |       | 17,994,936                  |            | 23,213,916                  |       |
| Deferred income taxes                                                                                                                                                                   |       | 193,807                     |            | 108,637                     |       |
| Accrued expenses                                                                                                                                                                        |       | 26,231,532                  |            | 43,307,501                  |       |
| Other current  liabilities                                                                                                                                                              |       | 50,765,012                  |            | 38,221,746                  |       |
| **Total current liabilities**                                                                                                                                                           | ** ** | **103,313,196**             | ** **      | **119,488,083**             | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| Capital lease  obligations excluding current instalments                                                                                                                                |       | 416,342                     |            | 390,653                     |       |
| Other liabilities                                                                                                                                                                       |       | 6,368,544                   |            | 8,124,060                   |       |
| Deferred income taxes                                                                                                                                                                   |       | 4,758,961                   |            | 3,744,639                   |       |
| **Total liabilities**                                                                                                                                                                   | ** ** | **$**                       | **114,857,043** | ** **                  | **$**      | **131,747,435** | ** ** |
| ** **                                                                                                                                                                              | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| Commitments and  contingencies                                                                                                                                                          |       |                        |            |                        |       |
|                                                                                                                                                                                    |       |                        |            |                        |       |
| **Shareholders’ Equity**                                                                                                                                                           | ** ** | ** **                  | ** **      | ** **                  | ** ** |
| Common  shares Rs. 2 par value; Authorized 250,000,000 shares (Issued and  outstanding; 137,798,399 shares and 138,281,853 shares as of  December 31, 2005 and 2006 respectively). |       | 6,101,600                   |            | 6,122,960                   |       |
| Additional paid-in  capital                                                                                                                                                             |       | 299,220,619                 |            | 305,030,981                 |       |
| Retained earnings                                                                                                                                                                       |       | 132,511,943                 |            | 183,197,559                 |       |
| Accumulated other  comprehensive income                                                                                                                                                 |       | 1,194,908                   |            | 14,241,716                  |       |
| **Total shareholders’ equity**                                                                                                                                                     | ** ** | **$**                       | **439,029,070** | ** **                  | **$**      | **508,593,216** | ** ** |
| **Total liabilities and  shareholders’ equity**                                                                                                                                    | ** ** | **$**                       | **553,886,113** | ** **                  | **$**      | **640,340,651** | ** ** |

 

**See accompanying notes to the consolidated financialstatemets**

** **

**F-3**

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** **

**Patni Computer Systems Limited and subsidiaries**

** **

**Consolidated Statements of Income**

** **
| **Year  ended December 31,**                                                  | ** ** | **2004**        | ** **     | **2005**        | ** ** | **2006**        | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------|----------------|-----------------|------------|-----------------|------------|
| ** **                                                                         | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| Revenues                                                                           |       | $               | 223,141,113    |            | $          | 350,972,760     |       | $ | 494,447,726 |   |
| Revenue from a  significant shareholder                                            |       | 103,440,511     |           | 99,359,172      |       | 84,403,156      |       |
|                                                                               |       | 326,581,624     |           | 450,331,932     |       | 578,850,882     |       |
| Cost of revenues                                                                   |       | 202,461,490     |           | 288,480,678     |       | 370,172,936     |       |
|                                                                               |       |            |           |            |       |            |       |
| **Gross profit**                                                                   | ** ** | **124,120,134** | ** **     | **161,851,254** | ** ** | **208,677,946** | ** ** |
| ** **                                                                         | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| Selling, general and  administrative expenses                                      |       | 60,699,901      |           | 89,880,905      |       | 110,264,979     |       |
| Provision for doubtful  debts and advances                                         |       | 495,618         |           | (151,954        | )          | 1,191,017       |       |
| Foreign exchange  (gain)/loss, net                                                 |       | 2,081,800       |           | 1,693,145       |       | 2,747,926       |       |
| ** **                                                                         | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| **Operating income**                                                               | ** ** | **60,842,815**  | ** **     | **70,429,158**  | ** ** | **94,474,024**  | ** ** |
| ** **                                                                         | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| Other income/(expense)                                                             |       |            |           |            |       |            |       |
| Interest  and dividend income                                                      |       | 4,222,853       |           | 4,189,776       |       | 10,087,916      |       |
| Interest  expense                                                                  |       | (2,083,285      | )              | (2,044,366      | )          | (2,839,930      | )          |
| Gain  on sale of investments, net                                                  |       | 144,482         |           | 1,128,071       |       | 1,679,097       |       |
| Other  (expense)/income, net                                                       |       | (3,692,704      | )              | 966,620         |       | 3,541,426       |       |
|                                                                               |       |            |           |            |       |            |       |
| **Income before income taxes**                                                     | ** ** | **59,434,161**  | ** **     | **74,669,259**  | ** ** | **106,942,533** | ** ** |
| Income taxes                                                                       |       | 12,886,362      |           | 13,802,583      |       | 47,691,763      |       |
|                                                                               |       |            |           |            |       |            |       |
| **Net income**                                                                     | ** ** | **$**           | **46,547,799** | ** **      | **$**      | **60,866,676**  | ** ** | **$** | **59,250,770** | ** ** |
| ** **                                                                         | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| **Earnings per share**                                                             | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| Basic                                                                              |       | $               | 0.38           |            | $          | 0.48            |       | $ | 0.43 |   |
| Diluted                                                                            |       | $               | 0.38           |            | $          | 0.48            |       | $ | 0.43 |   |
|                                                                               |       |            |           |            |       |            |       |
| **Weighted average number of common shares used in  computing earnings per share** | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| ** **                                                                         | ** ** | ** **      | ** **     | ** **      | ** ** | ** **      | ** ** |
| Basic                                                                              |       | 123,066,042     |           | 125,736,592     |       | 137,957,477     |       |
| Diluted                                                                            |       | 124,084,992     |           | 127,457,632     |       | 138,904,860     |       |

 

See accompanying notes to the consolidatedfinancial statements

 

F-4

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**Patni Computer Systems Limited and subsidiaries****ConsolidatedStatements of Shareholders’ Equity and Comprehensive Income for the years endedDecember 31, 2004, 2005 and 2006**

 
| ** **                                                                       | ** ** | ** **         | ** ** | ** **               | ** **    | ** **      | ** ** | ** **        | ** ** | **(in $ except share data)**     | ** **           |
|----------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|---------------|-----------------|------------|-------------------|------------|---------------------------------------|----------------------|
| ** **                                                                       | ** ** | **Common  shares** | ** ** | **Additional  Paid-In-** | ** **    | **Retained**    | ** ** | **Comprehensive** | ** ** | **Accumulated  Other  Comprehensive** | ** **           | **Shareholders** | ** ** |
| ** **                                                                       | ** ** | **Shares**         | ** ** | **Par  value**           | ** **    | **Capital**     | ** ** | **Earnings**      | ** ** | **Income**                            | ** **           | **Income** | ** ** | **Equity** | ** ** |
| ** **                                                                       | ** ** | ** **         | ** ** |
| **Balance  as of January 1, 2004**                                          | ** ** | **111,420,849**    | ** ** | **4,942,505**            | ** **    | **116,722,000** | ** ** | **34,692,917**    | ** ** | ** **                            | ** **           | **$** | **(1,525,344** | **)** | **$** | **154,832,078** | ** ** |
| Common shares  issued through an Initial Public Offering, net of direct expenses |       | 13,415,200         |       | 592,675                  |          | 63,675,676      |       |              |       |                                  |                 |   |   | 64,268,351 |   |
| Issuance of  equity shares on exercise of options                                |       | 160,960            |       | 7,121                    |          | 509,183         |       |              |       |                                  |                 |   |   | 516,304 |   |
| Cash dividend on  common shares                                                  |       |               |       |                     |          |            |       | (3,061,551        | )          |                                  |                 |   |   | (3,061,551 | ) |
| Comprehensive  income                                                            |       |               |       |                     |          |            |       |              |       |                                  |                 |   |   |   |   |
| Net income                                                                       |       |               |       |                     |          |            |       | 46,547,799        |       | 46,547,799                            |                 |   |   | 46,547,799 |   |
| Other  comprehensive income:                                                     |       |               |       |                     |          |            |       |              |       |                                  |                 |   |   |   |   |
| Translation  adjustment                                                          |       |               |       |                     |          |            |       |              |       | 9,549,971                             |                 |   |   | 9,549,971 |   |
| Unrealised gain  on investments, net of tax of $142,362                          |       |               |       |                     |          |            |       |              |       | 241,535                               |                 |   |   | 241,535 |   |
| Minimum pension  liability, net of tax of $153,253                               |       |               |       |                     |          |            |       |              |       | 332,292                               |                 |   |   | 332,292 |   |
| Comprehensive  income                                                            |       |               |       |                     |          |            |       |              |       | 56,671,597                            |                 | 10,123,798 |   |   |   |
| **Balance  as of December 31, 2004**                                        | ** ** | **124,997,009**    | ** ** | **$**                    | **5,542,301** | ** **      | **$**      | **180,906,859**   | ** ** | **$**                                 | ** 78,179,165** | ** ** | ** ** | ** ** | **$** | **8,598,454** | ** ** | **$** | **273,226,779** | ** ** |
| Common shares  issued, net of direct expenses                                    |       | 12,312,500         |       | 537,304                  |          | 116,484,548     |       |              |       |                                  |                 |   |   | 117,021,852 |   |
| Issuance of  equity shares on exercise of options                                |       | 488,890            |       | 21,995                   |          | 1,692,396       |       |              |       |                                  |                 |   |   | 1,714,391 |   |
| Tax benefit  arising on exercise of stock options                                |       |               |       |                     |          | 136,816         |       |              |       |                                  |                 |   |   | 136,816 |   |
| Cash dividend on  common shares                                                  |       |               |       |                     |          |            |       | (6,533,898        | )          |                                  |                 |   |   | (6,533,898 | ) |
| Comprehensive  income                                                            |       |               |       |                     |          |            |       |              |       |                                  |                 |   |   |   |   |
| Net income                                                                       |       |               |       |                     |          |            |       | 60,866,676        |       | 60,866,676                            |                 |   |   | 60,866,676 |   |
| Other  comprehensive income:                                                     |       |               |       |                     |          |            |       |              |       |                                  |                 |   |   |   |   |
| Translation  adjustment                                                          |       |               |       |                     |          |            |       |              |       | (7,278,016                            | )                    |   |   | (7,278,016 | ) |
| Unrealised gain  on investments, net of tax of $261,520                          |       |               |       |                     |          |            |       |              |       | 560,447                               |                 |   |   | 560,447 |   |
| Unrealised loss  on cash flow hedging derivatives, net of tax of $Nil            |       |               |       |                     |          |            |       |              |       | (1,026,624                            | )                    |   |   | (1,026,624 | ) |
| Minimum pension  liability, net of tax of $194,848                               |       |               |       |                     |          |            |       |              |       | 340,647                               |                 |   |   | 340,647 |   |
| Comprehensive  income                                                            |       |               |       |                     |          |            |       |              |       | 53,463,130                            |                 | (7,403,546 | ) |   |   |
| **Balance  as of December 31, 2005**                                        | ** ** | **137,798,399**    | ** ** | **$**                    | **6,101,600** | ** **      | **$**      | **299,220,619**   | ** ** | **$**                                 | **132,511,943**      | ** ** | ** ** | ** ** | **$** | **1,194,908** | ** ** | **$** | **439,029,070** | ** ** |

 

Seeaccompanying notes to the consolidated financial statements

 

F-5

----

 
| ** **                                                                         | ** ** | ** **         | ** ** | ** **               | ** **    | ** **      | ** ** | ** **        | ** ** | **(in $ except share data)**     | ** **      |
|------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|---------------|-----------------|------------|-------------------|------------|---------------------------------------|-----------------|
| ** **                                                                         | ** ** | **Common  shares** | ** ** | **Additional  Paid-In-** | ** **    | **Retained**    | ** ** | **Comprehensive** | ** ** | **Accumulated  Other  Comprehensive** | ** **      | **Shareholders** | ** ** |
| ** **                                                                         | ** ** | **Shares**         | ** ** | **Par  value**           | ** **    | **Capital**     | ** ** | **Earnings**      | ** ** | **Income**                            | ** **      | **Income** | ** ** | **Equity** | ** ** |
| ** **                                                                         | ** ** | ** **         | ** ** |
| **Balance  as of December 31, 2005**                                          | ** ** | **137,798,399**    | ** ** | **6,101,600**            | ** **    | **299,220,619** | ** ** | **132,511,943**   | ** ** | ** **                            | ** **      | **$** | ** 1,194,908** | ** ** | **$** | **439,029,070** | ** ** |
| Issuance of  equity shares on exercise of options                                  |       | 483,454            |       | 21,360                   |          | 1,802,953       |       |              |       |                                  |            |   |   | 1,824,313 |   |
| Tax benefit  arising on exercise of stock options                                  |       |               |       |                     |          | 23,338          |       |              |       |                                  |            |   |   | 23,338 |   |
| Compensation cost  related to employee stock option plan                           |       |               |       |                     |          | 3,984,071       | ** ** | ** **        | ** ** | ** **                            | ** **      | ** ** |   | 3,984,071 |   |
| Cash dividend on  common shares                                                    |       |               |       |                     |          |            |       | (8,565,154        | )          |                                  |            |   |   | (8,565,154 | ) |
| Comprehensive  income                                                              |       |               |       |                     |          |            |       |              |       |                                  |            |   |   |   |   |
| Net income                                                                         |       |               |       |                     |          |            |       | 59,250,770        |       | 59,250,770                            |            |   |   | 59,250,770 |   |
| Other  comprehensive income:                                                       |       |               |       |                     |          |            |       |              |       |                                  |            |   |   |   |   |
| Translation  adjustment                                                            |       |               |       |                     |          |            |       |              |       | 9,256,054                             |            |   |   | 9,256,054 |   |
| Unrealised gain  on investments, net of tax of $1,076,106                          |       |               |       |                     |          |            |       |              |       | 2,102,200                             |            |   |   | 2,102,200 |   |
| Unrealised gain  on cash flow hedging derivatives, net of tax of $ Nil        |       |               |       |                     |          |            |       |              |       | 2,531,633                             |            |   |   | 2,531,633 |   |
| Comprehensive  income                                                              |       |               |       |                     |          |            |       |              |       | 73,140,657                            |            | 13,889,887 |   |   |   |
| Adjustment to  initially apply FASB Statement No. 158, net of tax of $323,655 |       |               |       |                     |          |            |       |              |       |                                  |            | (843,079 | ) | (843,079 | ) |
|                                                                               |       |               |       |                     |          |            |       |              |       |                                  |            |   |   |   |   |
| **Balance  as of December 31, 2006**                                          | ** ** | **138,281,853**    | ** ** | **$**                    | **6,122,960** | ** **      | **$**      | **305,030,981**   | ** ** | **$**                                 | **183,197,559** | ** ** | ** ** | ** ** | **$** | **14,241,716** | ** ** | **$** | **508,593,216** | ** ** |
|                                                                                    |            |                    |            |                          |               |                 |            |                   |            |                                       |                 |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to the consolidated financialstatements

 

F-6

----

 

**Patni Computer Systems Limited and subsidiaries**

** **

**ConsolidatedStatements of Cash Flows**

** **
| **Year ended December 31,**                                        | ** ** | **2004**     | ** **      | **2005**     | ** ** | **2006**         | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------|-----------------|--------------|------------|------------------|------------|
| ** **                                                                        |       |         |            |         |       |             |       |
| **Operating  activities**                                                         |       |         |            |         |       |             |       |
| Net income                                                                        |       | $            | 46,547,799      |         | $          | 60,866,676       |       | $ | 59,250,770 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |         |            |         |       |             |       |
| Depreciation and  amortization                                                    |       | 11,543,775   |            | 15,960,705   |       | 19,573,548       |       |
| Deferred taxes                                                                    |       | (1,937,708   | )               | (1,889,293   | )          | 4,344,470        |       |
| Provision/(recovery)  for doubtful debts and advances                             |       | 495,618      |            | (151,954     | )          | 1,191,017        |       |
| (Gain)/loss on  sale of property, plant and equipment, net                        |       | 597,678      |            | (3,176,152   | )          | (21,977          | )          |
| (Gain) / loss on  sale of investments                                             |       | (144,482     | )               | (1,128,071   | )          | (1,679,097       | )          |
| Compensation  cost related to employee stock option plan                          |       | —       |            | —       |       | 3,984,071        |       |
| Changes in  assets and liabilities                                                |       |         |            |         |       |             |       |
| Accounts  receivable                                                              |       | (10,400,590  | )               | (3,531,903   | )          | (40,234,185      | )          |
| Costs and  estimated earnings in excess of billings on uncompleted contracts      |       | (5,032,911   | )               | (11,162,155  | )          | 3,955,003        |       |
| Other current assets                                                              |       | (3,445,375   | )               | 3,431,844    |       | (735,650         | )          |
| Other assets                                                                      |       | (2,714,988   | )               | (142,962     | )          | (579,720         | )          |
| Trade accounts  payable - others                                                  |       | (780,814     | )               | 1,428,007    |       | 4,025,950        |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts      |       | 634,645      |            | (456,143     | )          | 859,218          |       |
| Tax benefit  arising on exercise of stock options                                 |       | —       |            | 136,816      |       | —           |       |
| Taxes payable                                                                     |       | 2,377,631    |            | (463,113     | )          | 4,956,360        |       |
| Accrued expenses                                                                  |       | (569,178     | )               | 6,069,364    |       | 16,246,514       |       |
| Other current  liabilities                                                        |       | 9,803,420    |            | 14,815,277   |       | (17,063,525      | )          |
| Other  liabilities                                                                |       | 817,726      |            | (7,548,512   | )          | 1,018,325        |       |
|                                                                              |       |         |            |         |       |             |       |
| **Net  cash provided by operating activities**                                    | ** ** | **$**        | **47,792,246**  | ** **   | **$**      | **73,058,431**   | ** ** | **$** | **59,091,092** | ** ** |
|                                                                              |       |         |            |         |       |             |       |
| **Investing  activities**                                                         |       |         |            |         |       |             |       |
| Purchase of  property, plant and equipment                                        |       | (21,590,640  | )               | (53,282,451  | )          | (48,620,365      | )          |
| Proceeds from  sales of property, plant and equipment                             |       | 509,570      |            | 4,336,910    |       | 83,097           |       |
| Purchase of  investments                                                          |       | (255,601,922 | )               | (542,994,281 | )          | (781,204,843     | )          |
| Proceeds from  sale of investments                                                |       | 223,648,957  |            | 485,768,961  |       | 686,658,104      |       |
| Payments for  acquisition, net of cash acquired                                   |       | (32,450,060  | )               | (5,578,772   | )          | (12,184,832      | )          |
| Payments for  acquisition of technology related intangibles                       |       | —       |            | —       |       | (497,879         | )          |
| Tax benefit on  incentive stock option of Patni Telecom                           |       | —       |            | —       |       | 340,366          |       |
| **Net cash  used in investing activities**                                        | ** ** | **$**        | **(85,484,095** | **)**        | **$**      | **(111,749,633** | **)**      | **$** | **(155,426,352** | **)** |

 

Seeaccompanying notes to the consolidated financial statements

 

F-7

----

 
| **Year ended December 31,**                                            | ** ** | **2004**       | ** **     | **2005**       | ** ** | **2006**         | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------|----------------|----------------|------------|------------------|------------|
| ** **                                                                            |       |           |           |           |       |             |       |
| **Financing  activities:**                                                            |       |           |           |           |       |             |       |
| Payment of  capital lease obligations                                                 |       | (301,474       | )              | (329,168       | )          | (390,886         | )          |
| Dividend on  common shares                                                            |       | (3,059,633     | )              | (6,531,628     | )          | (8,562,666       | )          |
| Proceeds from  common shares issued, net of expenses                                  |       | 64,784,655     |           | 118,736,243    |       | 1,824,313        |       |
| Tax benefit  arising on exercise of stock options                                     |       | —         |           | —         |       | 23,338           |       |
| ** **                                                                            | ** ** | ** **     | ** **     | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** |
| **Net  cash provided by/(used in) financing activities**                              | ** ** | **$**          | **61,423,548** | ** **     | **$**      | **111,875,447**  | ** ** | **$** | **(7,105,901** | **)** |
| ** **                                                                            | ** ** | ** **     | ** **     | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** |
| Effect of  exchange rates changes on cash and cash equivalents                        |       | 5,472,249      |           | (1,508,142     | )          | 1,131,571        |       |
| **Net  increase in cash and cash equivalents**                                        | ** ** | **23,731,699** | ** **     | **73,184,245** | ** ** | **(103,441,161** | **)**      |
| Cash and cash  equivalents at the beginning of the year                               |       | 47,939,550     |           | 77,143,498     |       | 148,819,600      |       |
|                                                                                  |       |           |           |           |       |             |       |
| Cash and cash equivalents  at end of the year                                         |       | $              | 77,143,498     |           | $          | 148,819,600      |       | $ | 46,510,010 |   |
|                                                                                  |       |           |           |           |       |             |       |
| Supplemental  disclosure of cash flow information:                                    |       |           |           |           |       |             |       |
| Interest paid                                                                         |       | $              | 35,152         |           | $          | 673,158          |       | $ | 4,905,069 |   |
| Income taxes  paid                                                                    |       | $              | 12,536,145     |           | $          | 15,294,446       |       | $ | 39,945,075 |   |
|                                                                                  |       |           |           |           |       |             |       |   |   |   |
| Non cash  investing and financing activities:                                         |       |           |           |           |       |             |       |
| Additions to  property, plant and equipment, represented by capital lease obligations |       | $              | 393,184        |           | $          | 471,644          |       | $ | 361,133 |   |
| Property, plant  and equipment acquired on credit                                     |       | $              | 870,073        |           | $          | 2,104,773        |       | $ | 4,814,076 |   |

 

Seeaccompanying notes to the consolidated financial statements

 

F-8

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements**

 
| **1**        | **Organization and nature of business**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.1.1        | Patni  Computer Systems Limited (“Patni”) is a company incorporated in India under  the Indian Companies Act, 1956. On September 18, 2003, Patni converted  itself from a private limited company into a public limited company and  changed its name from Patni Computer Systems (P) Limited to Patni  Computer Systems Limited. In February 2004, Patni completed initial  public offering of its equity shares in India and in December 2005, the  Company completed initial public offering of American depositary shares in  the US.                                                                                                                                                                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.1.2        | Patni  Computers Systems (UK) Limited (“Patni UK”), a company incorporated in UK,  Patni Computer Systems GmbH (“Patni GmbH”), a company incorporated in Germany  and Patni Computer Systems, Inc. (“Patni USA”), a company incorporated  in Massachusetts, USA are 100% subsidiaries of Patni. On November 3,  2004, Patni USA, acquired 100% equity in Patni Telecom (formerly known as  Cymbal Corporation), a company incorporated in California, USA, together with  its subsidiaries in India, UK & Thailand, for consideration in cash.  Further, Patni also has foreign branch offices in USA, Japan, Sweden,  Australia, Korea, Netherlands, Finland, Dubai and Canada.

 

Cymbal  Information Services (Thailand) Ltd., subsidiary of Patni Telecom has been  dissolved and the liquidation has been completed in May, 2006. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.1.3        | Patni  together with its subsidiaries (collectively, “Patni Group” or “the Company”)  is engaged in IT consulting, software development and Business Process Outsourcing  (“BPO”). The Company provides multiple service offerings to its clients  across various industries comprising financial services, insurance services,  manufacturing, telecommunications services and technology services  (comprising independent software vendors and product engineering) and other  industries such as energy and utilities, retail, logistics and  transportation, and media and entertainment. The various service offerings  comprise application development, application maintenance and support, packaged  software implementation, infrastructure management services, product  engineering services, quality assurance services and BPO services.         |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 1.1.4        | These  financial statements are prepared on a consolidated basis for all the years  presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2**        | **Summary of significant accounting policies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *** *** | ***Basis of preparation of financial  statements***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.1        | The  accompanying consolidated financial statements have been prepared in  accordance with accounting principles generally accepted in the United States  of America (“US GAAP”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *** *** | ***Principles of consolidation***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.2        | The  consolidated financial statements include the financial statements of Patni  and all of its subsidiaries, which are more than 50% owned and controlled. In  addition, the Company consolidates any Variable Interest Entity (“VIE”) if it  is determined to be a primary beneficiary in accordance with FASB  Interpretation No. 46(R), “Consolidation of Variable Interest Entities”.  The Company accounts for investments by the equity method where its investment  in the voting stock gives it the ability to exercise significant influence  over the investee. However, as of December 31, 2005 and 2006, the  Company does not have any interest in any VIE, or any equity method  investment. All inter-company accounts and transactions are eliminated on  consolidation.                                                                      |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *** *** | ***Accounting estimates***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.1.3        | The  preparation of financial statements in conformity with US GAAP requires that  management makes estimates and assumptions that affect the reported amount of  assets and liabilities and disclosures of contingent assets and liabilities  as of the date of the financial statements and the reported amounts of  revenue and expenses during the reporting period. Management believes that  the estimates used in the preparation of the consolidated financial  statements are prudent and reasonable. The actual results could differ from  these estimates.                                                                                                                                                                                                                                                                                                                         |

 

F-9

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidated financial statements(Continued)**

 
| *** *** | ***Revenue and cost recognition***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.1.4        | The  Company derives its revenues primarily from software services and to a lesser  extent from BPO services. Revenue is recognized when there is persuasive  evidence of a contractual arrangement with customers, delivery has occurred,  the sales price is fixed or determinable and collectibility is probable.  Software services are provided either on a fixed price, fixed time frame or  on a time and material basis. The Company’s fixed price contracts include  application maintenance and support services, on which revenue is recognized  on a straight line basis over the term of maintenance. Revenue with respect  to other fixed price contracts is recognized on a percentage of completion  basis. Revenue with respect to time-and-material contracts is recognized as  related services are performed. Guidance has been drawn from paragraph 95 of  Statement of Position (‘‘SOP’’) 97-2, ‘‘Software Revenue Recognition’’ to  account for revenue from fixed price arrangements for software development  and related services in conformity with *SOP-81-1  (“Accounting for Performance of Construction - Type and Certain Production -  Type Contracts”)*. The input (cost expended) method has been used  because management considers this to be the best available measure of  progress on these contracts as there is a direct relationship between input  and productivity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.5        | The  asset, “Cost and estimated earnings in excess of billings on uncompleted  contracts”, represents revenues recognized in excess of amounts billed. These  amounts are billed after the milestones specified in the agreement are  achieved and the customer acceptance for the same is received. The liability,  “Billings in excess of costs and estimated earnings on uncompleted contracts”,  represents billings in excess of revenues recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.6        | Direct  and incremental contract origination and set up costs incurred in connection  with support/maintenance service arrangements are charged to expense as  incurred. These costs are deferred only in situations where there is a  contractual arrangement establishing a customer relationship for a specified  period. The costs to be deferred are limited to the extent of future  contractual revenues. Further, revenue attributable to set up activities is  deferred and recognised systematically over the periods that the related fees  are earned, as services performed during such period do not result in the  culmination of a separate earnings process.

 

Costs  that are incurred for a specific anticipated contract and that will result in  no future benefits unless the contract is obtained, are not included in  contract costs before the receipt of the contract. However, such costs are  deferred, subject to the evaluation of their probable recoverability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.7        | Warranty  costs on sale of services are accrued based on managements’ estimates and  historical data at the time related revenues are recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.8        | The  Company grants volume discounts to certain customers, which are computed  based on a pre-determined percentage of the total revenues from those  customers during a specified period, as per the terms of the contract. These  discounts are earned only after the customer has provided a specified  cumulative level of revenues in the specified period. The discounts can be  utilized by the customer in the form of free services.

 

The  Company estimates the total number of customers that will ultimately earn  these discounts, based on which a portion of the revenue on the related  transactions is allocated to the free services that will be delivered in the  future. The amount of revenue to be allocated to the free services is based  on the relative fair value of the free services.

 

The  Company reports revenues net of discounts offered to customers. In accounting  for the above volume discounts, guidance has been obtained from *Emerging Issues Task Force (“EITF”) 00-22  “Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales  Incentive Offers, and Offers for Free Products or Services to Be Delivered in  the Future” and EITF 01-09, “Accounting for Consideration Given by a Vendor  to a Customer (Including a Reseller of the Vendor’s Products)”*.  Accordingly, these volume discounts have been recorded based on estimate of  the total number of customers that will ultimately earn these discounts as it  is believed that, based on historical experience, reliable estimates can be  made of the estimated amount of revenues from a particular customer in the  specified period.

 

Reimbursement  of out of pocket expenses received from customers have been included as part  of revenues in accordance with *EITF 01-14  “Income Statement Characterization of Reimbursements Received for ‘Out of  Pocket’ Expenses Incurred”*. |

 

F-10

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidated financial statements(Continued)**

 
| 2.1.9        | Revenue  from BPO is recognised on proportionate performance method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *** *** | ***Advertising cost***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1.10       | Advertising  costs incurred during the year have been expensed. The total amount of  advertising costs expensed was $1 million, $1.5 million and $1.6 million for  the years ended December, 31, 2004, 2005 and 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *** *** | ***Cash and cash equivalents***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1.11       | The  Company considers investments in highly liquid investments with an original  maturity of three months or less to be cash equivalents. Cash and cash  equivalents comprise cash and cash on deposit with banks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | ***Investments***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1.12       | Management  determines the appropriate classification of investment securities at the  time of purchase and re-evaluates such designation at each balance sheet  date. At December 31, 2005 and 2006, investment securities were  classified as available-for-sale or held to maturity. The investment  securities classified as available-for-sale consisted of units of mutual  funds. Held to maturity securities consist of investment in Government bonds  made by the Company pursuant to tax exemption scheme under the Indian Income  Tax Act, 1961. These bonds are carried at cost in the absence of market value  and mature in three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1.13       | Available-for-sale  securities are carried at fair market value with unrealized gains and losses,  net of deferred income taxes, reported as a separate component of other  comprehensive income in the statement of shareholders’ equity and  comprehensive income. Realized gains and losses, and decline in value judged  to be other than temporary on available-for-sale securities are included in  the consolidated statements of income. The cost of securities sold or  disposed is determined on average cost basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *** *** | ***Business combinations, goodwill and  intangible assets***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1.14       | *Statement of Financial Accounting Standards (“SFAS”)  No. 141, “Business Combinations”*requires that the purchase method of  accounting be used for all business combinations. SFAS No. 141 specifies  criteria that intangible assets acquired in a business combination must be  recognized and reported separately from goodwill. In accordance with *SFAS No. 142, “Goodwill and Other Intangible  Assets”* all assets and liabilities of the acquired businesses  including goodwill are assigned to reporting units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1.15       | Goodwill  represents the cost of the acquired businesses in excess of the fair value of  identifiable tangible and intangible net assets purchased. Goodwill is not  amortized but is tested for impairment at least on an annual basis, relying  on a number of factors including operating results, business plans and future  cash flows. Recoverability of goodwill is evaluated using a two-step process.  The first step involves a comparison of the fair value of a reporting unit  with its carrying value. If the carrying amount of the reporting unit exceeds  its fair value, the second step of the process involves a comparison of the  fair value and carrying value of the goodwill of that reporting unit. If the  carrying value of the goodwill of a reporting unit exceeds the fair value of  that goodwill, an impairment loss is recognized in an amount equal to the  excess. Goodwill of a reporting unit will be tested for impairment between  annual tests if an event occurs or circumstances change that would more  likely than not reduce the fair value of the reporting unit below its  carrying amount. |

 

F-11

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidated financial statements(Continued)**

 
| 2.1.16       | Intangible  assets are amortized over their respective individual estimated useful lives  in proportion to the economic benefits consumed in each period. Intangible  assets comprise customer and technology related intangibles and are being  amortized over a period of 5-10 years. The estimated useful life of an  identifiable intangible asset is based on a number of factors including the  effects of obsolescence, demand, competition and other economic factors (such  as the stability of the industry, and known technological advances) and the  level of maintenance expenditures required to obtain the expected future cash  flows from the asset. |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.1.17       | Intangible  assets are evaluated for recoverability whenever events or changes in  circumstances indicate that their carrying amounts may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of  the carrying amount of an asset to future undiscounted net cash flows  expected to be generated by the asset. If such assets are considered to be  impaired, the impairment to be recognized is measured by the amount by which  the carrying value of the assets exceeds the fair value of the assets.                                                                                                                    |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *** *** | ***Property, plant and equipment***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1.18       | Property,  plant and equipment are stated at cost less accumulated depreciation and  amortization. Gains and losses on disposals are included in the consolidated  statements of income at amounts equal to the difference between the net book  value of the disposed assets and the net proceeds received upon disposal.  Expenditures for replacements and improvements are capitalized, whereas the  cost of maintenance and repairs is charged to income when incurred.                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.1.19       | Property,  plant and equipment are depreciated over the estimated useful life of the  asset using the straight-line method, once the asset is put to its intended  use. The cost of software obtained for internal use is capitalized and  amortized over the estimated useful life of the software. The estimated  useful lives of assets are as follows:                                                                                                                                                                                                                                                                                                             |

 
| Buildings                                                           | 40  years                                                                      |
|---------------------------------------------------------------------|--------------------------------------------------------------------------------|
| Leasehold  premises and improvements                                | Over  the lease period or the useful lives of the assets, whichever is shorter |
|                                                                |                                                                           |
| Computer  – Hardware and software and other service equipments | 3  years                                                                       |
| Furniture  and fixtures                                             | 3-8  years                                                                     |
| Other  equipment                                                    | 3-8  years                                                                     |
| Vehicles                                                            | 4-5  years                                                                     |

 
|         | ***Impairment of long-lived assets and  long-lived assets to be disposed***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1.20       | Long-lived  assets and certain identifiable intangibles are reviewed for impairment  whenever an event or changes in circumstances indicate that the carrying  amount of such assets may not be recoverable. Recoverability of assets to be  held and used is measured by a comparison of the carrying amount of an asset  to future net undiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized  is measured by the amount by which the carrying amount of the assets exceeds  the fair value of assets. Assets to be disposed of are reported at the lower  of the carrying amount or fair value less cost to sell. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *** *** | ***Functional and Foreign currency  translation***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1.21       | The  functional currency of Patni and its branches in the US, Japan, Sweden,  Australia, Korea and Netherland is the Indian Rupee. The functional  currencies of Patni’s subsidiaries are the applicable local currencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.1.22       | The  accompanying consolidated financial statements are reported in US Dollars.  The translation is performed for balance sheet accounts using the exchange  rate in effect at the balance sheet date and for statements of income  accounts using an appropriate monthly weighted average exchange rate for the  respective periods. In respect of subsidiaries, the respective functional  currencies are first translated into Indian Rupees and then into US Dollars.  The gains or losses resulting from such translation are reported in other  comprehensive income in the statement of shareholders’ equity and  comprehensive income.                                                         |

 

F-12

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidated financial statements(Continued)**

 
| *** *** | ***Foreign currency transactions***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.23       | Transactions  in foreign currencies are translated into the functional currency at the rates  of exchange prevailing at the date of the transaction. Resulting gains or  losses from settlement of such foreign currency transactions are included in  the consolidated statements of income. Unsettled monetary assets and  liabilities denominated in foreign currencies are translated into the  functional currency at the rates of exchange prevailing at the balance sheet  date. Transaction gain or loss arising from change in exchange rates between  the date of transaction and period end exchange rates are included in the  consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         | ***Income taxes***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.24       | Income  taxes are accounted for under the asset and liability method. Deferred tax  assets and liabilities are recognized for the future tax consequences  attributable to differences between the financial statement carrying amounts  of existing assets and liabilities and their respective tax bases and  operating loss carry forwards. Deferred tax assets and liabilities are  measured using enacted tax rates expected to apply to taxable income in the  years in which those temporary differences are expected to be recovered or  settled. The effect on deferred tax assets and liabilities of changes in tax  rates is recognized in results of operations in the period that includes the  enactment date. The measurement of deferred tax assets is reduced, if  necessary, by a valuation allowance if it is more likely than not that some  portion or all of the assets will not be realised.                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *** *** | ***Concentration of credit risk***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.25       | Financial  instruments that potentially subject the Company to concentration of credit  risks consist principally of cash, cash equivalents, investments and accounts  receivables. Cash and cash equivalents are invested with corporations,  financial institutions and banks with investment grade credit ratings. To  reduce credit risk, investments are made in a diversified portfolio of mutual  funds, government bonds, which are periodically reviewed. To reduce its  credit risk on accounts receivables, the Company performs ongoing credit  evaluations of customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         | ***Retirement benefits to employees***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.26       | Contributions  to defined contribution plans are charged to income in the period in which  they accrue. Current services costs for defined benefit plans are accrued in  the period to which they relate, based on actuarial valuation performed by an  independent actuary in accordance with *SFAS  No. 87, “Employers’ Accounting for Pensions”, SFAS No. 132R  “Employers’ Disclosures about Pensions and Other Postretirement Benefits”,  both as amended by SFAS No. 158 “Employer’s Accounting for Defined  Benefit Pension and Other Postretirement Plans”*. The Company  adopted SFAS No. 158 as of December 31, 2006 which requires the net  funded position of the plans to be recognized as an asset or liability in the  employers’ balance sheet. The net effect of adopting this new standard was a  reduction in the stockholders’ equity of $0.8 million. Refer note 18.1.18 for  computation of the net effect.                                         |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         | ***Stock-based compensation***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1.27       | The  Company adopted *SFAS No. 123R, “Share-Based  Payment” (SFAS No. 123R)* effective January 1, 2006. This  statement requires compensation expense relating to share-based payments to  be recognized in net income using a fair value measurement method. Under the  fair value method, the estimated fair value of awards is charged to income on  a accelerated basis over the requisite service period, which is generally the  vesting period.The Company elected the modified prospective method as  prescribed in SFAS No. 123R and therefore, prior periods were not restated.  Under the modified prospective method, this statement was applied to new  awards granted after the time of adoption, as well as to the unvested portion  of previously granted equity-based awards for which the requisite service had  not been rendered as of January 1, 2006. The Company granted stock  options under the ‘Patni ESOP 2003’ plan (‘the plan’). See Note 16 for  further discussion. |

 

F-13

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidated financial statements(Continued)**

 

Share-basedcompensation expense in 2006 reduced the Company’s results of operations asfollows:

 
| ** **                  | ** ** | **2006**  | ** ** |
|-----------------------------|------------|-----------|------------|
| Income before  income taxes |       | $         | 3,984,071  |   |
| Net Income                  |       | 3,299,530 |       |
| Basic earnings  per share   |       | $         | 0.02       |   |

 

Thefair value of each option is estimated on the date of grant using theBlack-Scholes model with the following assumptions. 

 
| **Year ended**      | ** ** | **2006**      | ** ** |
|---------------------|------------|---------------|------------|
| Dividend yield      |       | 0.59% - 0.63% |       |
| Expected life       |       | 3.5-6.5 years |       |
| Risk free  interest |       | 6.45% - 7.85% |       |
| Volatility          |       | 30.22% - 55%  |       |

 
| 2.1.28 | Prior  to January 1, 2006, the company accounted for share-based employee  compensation under the provisions of SFAS No. 123 using the intrinsic  value method prescribed by APB No. 25 and related interpretations. Under  the intrinsic value method, no compensation expense was recognized for stock  options, as the exercise price of employee stock options equated the market  value of the Company’s stock on the date of grant. The following pro forma  net income and earnings per share information had been determined as if the  Company had accounted for its share-based compensation awards issued using  the fair value method in 2004 and 2005. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Year**                                                                                                       | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net income, as  reported                                                                                       |       | $          | 46,547,799 |       | $          | 60,866,676 |   |
| Less: Stock  based employee compensation expense determined under fair value based method,  net of tax effects |       | (1,253,513 | )          | (3,501,531 | )          |
| Pro forma net  income                                                                                          |       | $          | 45,294,286 |       | $          | 57,365,145 |   |
| Reported  earnings per share                                                                                   |       |       |       |       |       |
| Basic                                                                                                          |       | $          | 0.38       |       | $          | 0.48 |   |
| Diluted                                                                                                        |       | $          | 0.38       |       | $          | 0.48 |   |
| Pro forma  earnings per share                                                                                  |       |       |       |       |       |
| Basic                                                                                                          |       | $          | 0.37       |       | $          | 0.46 |   |
| Diluted                                                                                                        |       | $          | 0.37       |       | $          | 0.45 |   |

** **
| 2.1.29 | The  pro forma amounts and fair value of each option grant were estimated on the  date of grant using the Black-Scholes option pricing model with the following  weighted average assumptions used for grants in 2004 and 2005: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Year ended December 31,** | ** ** | **2004**      | ** ** | **2005**      | ** ** |
|--------------------------------------------|------------|---------------|------------|---------------|------------|
| Dividend yield                             |       | 0.34% - 0.72% |       | 0.53% - 0.54% |       |
| Expected life                              |       | 2-5 years     |       | 2-5 years     |       |
| Risk free  interest rates                  |       | 5.16% - 6.46% |       | 5.74% - 6.73% |       |
| Volatility                                 |       | 43% - 65%     |       | 28% - 50%     |       |

 
|         | The  Black-Scholes model is a trading pricing model that does not reflect either  the non-traded nature of employee stock options or the limited  transferability of such options. This model also does not consider  restrictions on trading for all employees, including certain restrictions  imposed on senior management of the Company. Therefore, if the Company had  used an option pricing model other than Black-Scholes, pro forma results  different from those shown above may have been reported. |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|  2.1.30 | Prior  to the adoption of SFAS 123R, the Company was required to record benefits  associated with the tax deductions in excess of recognized compensation cost  as an operating cash flow. However SFAS 123R requires that such benefits be  recorded as a financing cash inflow. In the accompanying Consolidated  Statements of Cash Flows for year ended December 31, 2006, tax benefit  of $23,338 has been classified as financing cash flows.                                                        |

 

F-14

----

 

**PatniComputer Systems Limited and subsidiaries**

** **

**Notes to the consolidatedfinancial statements (Continued)**

** **
|         | ***Dividends***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.31       | Dividends  on common shares are recorded as a liability on the date of declaration by  the shareholders at the Annual General Meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *** *** | ***Derivatives and hedge accounting***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.32       | The  Company evaluates its risk management program and hedging strategies in  respect of forecasted transactions, and, upon completion of the formal  documentation and testing for effectiveness, the Company designates certain  forward contracts in respect of forecasted transactions, which meet the  hedging criteria, as cash flow hedges. Changes in fair values of designated  cash flow hedges are deferred and recorded as a component of accumulated  other comprehensive income until the hedged transactions occur and are then  recognised in the consolidated statements of income. Changes in fair value  for derivatives not designated as hedging instruments and ineffective portion  of the hedging instruments are recognized in consolidated statements of  income in the current period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1.33       | In  respect of derivatives designated as hedges, the Company formally documents  all relationships between hedging instruments and hedged items, as well as  its risk management objective and strategy for undertaking various hedge  transactions. The Company also formally assesses, both at the inception of  the hedge and on an ongoing basis, whether each derivative is highly  effective in offsetting changes in fair values or cash flows of the hedged item.  If it is determined that a derivative is not highly effective as a hedge, or  if a derivative ceases to be a highly effective hedge, the Company will,  prospectively, discontinue hedge accounting with respect to that derivative.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *** *** | ***Earnings per share***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.34       | In  accordance with *SFAS No. 128,  “Earnings per Share”*, basic earnings per share is computed using  the weighted average number of common and redeemable common shares  outstanding during the period. Diluted earnings per share is computed using  the weighted average number of common and redeemable common shares and  dilutive common equivalent shares outstanding during the period using the  treasury stock method for options except where the result would be  anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *** *** | ***Reclassifications***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.35       | Certain  reclassifications have been made in the financial statements of prior years  to conform to classifications used in the current year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *** *** | ***Commitments and Contingencies***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.36       | Liabilities  for loss contingencies arising from claims, assessments, litigations, fines  and penalties and other sources are recorded when it is probable that a  liability has been incurred and the amount of the assessment and/or  remediation can be reasonably estimated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *** *** | ***Recently Issued Accounting Standards***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1.37       | The  Financial Accounting Standards Board (“FASB”) issued *FASB Interpretation No. 48 “Accounting for  Uncertainty in Income Taxes”* (“FIN 48”) in June 2006. FIN 48  clarifies the accounting for uncertainty in income taxes recognised in an  enterprise’s financial statements in accordance with *FASB Statement No. 109 “Accounting for Income  Taxes”.*This Interpretation prescribes a recognition threshold and  measurement attribute for the financial statement recognition and measurement  of a tax position taken or expected to be taken in a tax return. The  Interpretation also provides guidance on recognition, classification,  interest, penalties, accounting in interim periods, disclosure and  transition. The Interpretation is effective for fiscal years beginning after  December 15, 2006. The differences, if any between the amounts  recognized in the statements of financial position prior to the adoption of  FIN 48 and the amounts reported after adoption will be accounted for as a  cumulative-effect adjustment recorded to the beginning balance of retained  earnings. The Company is currently evaluating the impact of this  Interpretation on its financial statements. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1.38       | The  Financial Accounting Standards Board (“FASB”) issued *SFAS No. 157 “Fair Value Measurements”*  (SFAS No. 157) in September 2006. SFAS No. 157 establishes a  framework for measuring fair value and expands disclosures about fair value  measurements. The changes to current practice resulting from the application  of this Statement relate to the definition of fair value, the methods used to  measure fair value, and the expanded disclosures about fair value  measurements. The Statement is effective for fiscal years beginning after  November 15, 2007 and interim periods within those fiscal years. The  Company is currently evaluating the impact that is expected to result from  the adoption of this standard                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

F-15

----

 

**Patni Computer Systems Limited and subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 
| **3**      | **Acquisition of Patni Telecom**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|       | On  November 3, 2004, Patni USA acquired 100% equity interest in Patni  Telecom which is engaged in providing IT services to clients in the telecom  sector. The primary purpose for the acquisition was to establish presence in  the Telecom IT services sector. The consolidated financial statements include  the operating results of Patni Telecom from the date of acquisition. The  purchase price of $25,093,065 (including direct expenses of $1,311,150) was  paid in cash. Additionally, in connection with the acquisition, the Company  incurred $10,968,029 of costs relating to certain contract terminations /  settlements and acquisition costs of Patni Telecom. Such costs have been  recognised by the Company as liabilities assumed at the acquisition date resulting  in additional goodwill.                                                                                                                                                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|       | As  per the Stock Purchase Agreement and amendments thereof, $5,578,772 and  $12,184,832 was paid to the shareholders of Patni Telecom as contingent  consideration based on achievement of certain revenue and margin targets for  the years ended June 30, 2005 and 2006 . This additional consideration  has been recognised as Goodwill arising on acquisition of Patni Telecom. The  terms of the purchase also provide for payment of contingent consideration to  all the selling shareholders, payable over three years, and calculated based  on the achievement of specified revenue and margin targets. The contingent  consideration is payable in cash and cannot exceed $33,000,000, inclusive of  payments under an incentive plan for certain employees as described below.  The Company has followed the consensus reached in *EITF 95-8, “Accounting for Contingent Consideration Paid to the  Shareholders of an Acquired Enterprise in a Purchase Business Combination”*  and accordingly will record the contingent payments, other than payments to  certain employees under the incentive plan, as goodwill in the periods in  which the contingency is resolved. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|       | Further,  as a part of the acquisition, the Company initiated an incentive plan linked  to revenues and margins, for certain specific employees of Patni Telecom. The  incentive payments under this plan will not exceed $3,400,000 till  June 2007. Since, the incentive payments are linked to continuing  employment, the payments under the plan are recognised as compensation for  post acquisition services. Accordingly, $664,709 and $176,177 have been  recorded as Cost of revenues and Selling, General and Administrative expenses  in the year ended December 31, 2005 respectively and $587,001 and  $756,841 have been recorded Cost of revenues and Selling, General and  Administrative expenses in the year ended December 31, 2006  respectively. No such amounts were recorded for the year ended  December 31, 2004.                                                                                                                                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **4**      | **Investments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1.1      | Investment  securities consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 
| ** **                              | ** ** | **As of December 31, 2005** | ** **  |
|-----------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                              | ** ** | **Carrying  value**                             | ** **  | **Gross  unrealized  holding gains** | ** ** | **Gross  unrealised  holding  losses** | ** ** | **Fair value** | ** ** |
| **Available  for sale:**                | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mutual fund  units and other securities |       | $                                               | 107,568,976 |   | $ | 774,895 |   | $ | (1,867 | ) | $ | 108,342,004 |   |
| Other  Investments                      |       | 2,909,577                                       |        | 524,354 | ** ** | **—** |   | 33,433,931 |   |
| Amount reported  as investment current  | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | **$** | **141,775,935** | ** ** |
|                                         |            |                                                 |             |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                  | ** ** | **As of December 31, 2006** | ** **  |
|---------------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                                  | ** ** | **Carrying  value**                             | ** **  | **Gross  unrealized  holding gains** | ** ** | **Gross  unrealised  holding  losses** | ** ** | **Fair value** | ** ** |
| **Available  for sale:**                    | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mutual fund  units and other securities     |       | $                                               | 135,238,933 |   | $ | 1,125,406 |   | (9,391 | ) | $ | 136,354,948 |   |
| Other  Investments                          |       | 103,262,905                                     |        | 3,350,195 |   | — |   | 106,613,100 |   |
|                                        |       |                                            |        |   |   |   |   |   |   |
| Amount reported  as investments current     | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | **$** | **242,968,048** | ** ** |
|                                        | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Held to  maturity:**                      | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bonds                                       |       | $                                               | 3,048,092   |   | — |   | — |   | $ | 3,048,092 |   |
| Amount reported  as investments non current | ** ** | ** **                                      | ** **  | ** ** | ** ** | ** ** | ** ** | **$** | **3,048,092** | ** ** |
|                                             |            |                                                 |             |  |  |  |  |  |  |  |  |  |

 

F-16

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 
| **4**  |       | **Investments *(Continued)***                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.2  |       | Dividends  from securities available for sale, during the year ended December 31,  2004, 2005 and 2006 were $3,460,351, $2,488,691 and $5,941,888 respectively.  Gross realized gains on sale of securities, available for sale was $221,562 ,  $1,141,015 and $1,963,728 and gross realised losses on sale of securities,  available for sale was $77,080, $12,945 and $284,631 for the year ended  December 31, 2004, 2005 and 2006 respectively. |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.3  |       | Investments  held to maturity as of December 31, 2006 mature within five years                                                                                                                                                                                                                                                                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **5**  | ** ** | **Accounts receivable**                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 5.1.1  |       | Accounts  receivable consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                |

 
| **As of December 31,**                                                                                            | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|
| Receivables                                                                                                                      |       | $          | 76,916,380     |       | $          | 118,724,268 |   |
| Less: Allowances  for doubtful accounts (including $136,066 (2005 - $80,000) for receivable due  from a significant shareholder) |       | (2,495,219 | )              | (3,105,764 | )          |
| ** **                                                                                                                       | ** ** | **$**      | **74,421,161** | ** ** | **$**      | **115,618,504** | ** ** |

 
| 5.1.2 |   | The  activity in the allowance for doubtful accounts receivable for the years  ended December 31, 2005 and 2006 is as follows: |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

 
| **As of December 31,**                                                  | ** ** | **2004** | ** **    | **2005**   | ** ** | **2006**      | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|---------------|------------|------------|---------------|------------|
| Allowance for  doubtful accounts as at beginning of the year                           |       | $        | 3,224,494     |       | $          | 3,435,320     |       | $ | 2,495,219 |   |
| Additions  charged (net of recoveries) to provision for doubtful debts during the year |       | 496,804  |          | (164,464   | )          | 1,147,109     |       |
| Write-downs  charged against the allowance during the year                             |       |     |          |       |       |          |       |
| Allowance for  doubtful accounts at end of the year                                    | ** ** | **$**    | **3,435,320** | ** ** | **$**      | **2,495,219** | ** ** | **$** | **3,105,764** | ** ** |

 
| **6** | ** ** | **Costs and estimated earnings in excess of billings and  billings in excess of costs and estimated earnings on uncompleted contracts** |
|-------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|

 
| **As of December 31,**                                        | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cost incurred on  uncompleted contracts                                      |       | $          | 25,750,930 |       | $          | 28,813,363 |   |
| Estimated  earnings                                                          |       | 24,028,742 |       | 21,676,222 |       |
| Less: Billings  till date                                                    |       | 49,779,672 |       | 50,489,585 |       |
|                                                                         |       | $          | 23,743,748 |       | $          | 19,509,764 |   |
| Included in the  accompanying balance sheet under the following captions:    |       |       |       |       |       |
| Costs and estimated  earnings in excess of billings on uncompleted contracts |       | 26,094,094 |       | 22,834,345 |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | (2,350,346 | )          | (3,324,581 | )          |
|                                                                         |       | 23,743,748 |       | 19,509,764 |       |

 

F-17

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 
| **7**      | ** ** | **Other assets**                        |
|------------|------------|-----------------------------------------|
| ** ** | ** ** | ** **                              |
|       |       | Other  assets consist of the following: |

 
| **As of December 31,**                | ** **                                           | **2005**     | ** **     | **2006**   | ** **   |
|------------------------------------------------------|------------------------------------------------------|--------------|----------------|------------|--------------|
| ** **                                           | ** **                                           | ** **   | ** **     | ** ** | ** **   |
| Advances to vendors                                  |                                                 | $            | 1,507,000      |       | $            | 1,340,596 |   |
| Prepaid gratuity  costs                              |                                                 | 1,442,528    |           | 918,045    |         |
| Deposits                                             |                                                 | 6,447,290    |           | 6,708,622  |         |
| Deferral of cost  in respect of revenue arrangements |                                                 | 1,574,252    |           | 902,063    |         |
| Due from  employees                                  |                                                 | 1,309,344    |           | 2,695,126  |         |
| Derivative  contracts                                |                                                 |  — |           | 3,035,271  |         |
| Leasehold Land                                       |                                                 | 3,765,076    |           | 5,223,196  |         |
| Others                                               |                                                 | 1,164,338    |           | 495,069    |         |
| ** **                                           | ** **                                           | **$**        | **17,209,828** | ** ** | **$**        | **21,317,988** | ** ** |
| Less:                                                | Current assets                                       |         |           |       |         |   |
|                                                 | Advances to  vendors                                 |         | (1,507,000     | )          | (1,340,596   | ) |
|                                                 | Prepaid gratuity  costs                              |         | (1,442,528     | )          |  — |   |
|                                                 | Deposits                                             |         | (531,329       | )          | (1,424,163   | ) |
|                                                 | Deferral of cost  in respect of revenue arrangements |         | (1,574,252     | )          | (902,063     | ) |
|                                                 | Due from employees                                   |         | (1,278,554     | )          | (2,663,601   | ) |
|                                                 | Derivative  contracts                                |         | —         |       | (3,035,271   | ) |
|                                                 | Others                                               |         | (1,164,338     | )          | (495,069     | ) |
|                                                 |                                                 | (7,498,001   | )              | (9,860,763 | )            |
| Other assets                                         | ** **                                           | **$**        | **9,711,827**  | ** ** | **$**        | **11,457,225** | ** ** |

 
| **8**      | ** **                                                | **Property, plant and equipment** |
|------------|-----------------------------------------------------------|-----------------------------------|
| ** ** | ** **                                                | ** **                        |
| 8.1.1      | Property,  plant and equipment consists of the following: |

 
| **As of December 31,**                 | ** ** | **2005**    | ** **     | **2006**    | ** ** |
|-------------------------------------------------------|------------|-------------|----------------|-------------|------------|
| ** **                                            | ** ** | ** **  | ** **     | ** **  | ** ** |
| Land                                                  |       | $           | 24,053         |        | $          | 24,476 |   |
| Building                                              |       | 22,645,127  |           | 31,944,802  |       |
| Leasehold  improvements                               |       | 4,133,345   |           | 5,814,610   |       |
| Computer –  Hardware and other service equipment |       | 32,893,636  |           | 41,075,166  |       |
| Computer –  Software                             |       | 19,021,359  |           | 23,109,772  |       |
| Furniture and  fixtures                               |       | 14,613,120  |           | 18,092,401  |       |
| Other equipment                                       |       | 17,522,391  |           | 27,003,946  |       |
| Vehicles                                              |       | 2,244,283   |           | 2,295,679   |       |
| Capital  work-in-progress                             |       | 18,359,453  |           | 26,864,096  |       |
| Capital advances                                      |       | 8,474,405   |           | 20,537,480  |       |
|                                                  |       | 139,931,172 |           | 196,762,428 |       |
| Less:  Accumulated depreciation and amortization      |       | (51,686,625 | )              | (71,004,604 | )          |
| ** **                                            | ** ** | **$**       | **88,244,547** | ** **  | **$**      | **125,757,824** | ** ** |

 
| 8.1.2 | Depreciation  and amortization expense on property, plant and equipment was $11,332,906,  $15,212,682 and $18,605,047 for the years ended December 31, 2004, 2005  and 2006 respectively and include amortization for computer software of  $2,586,273, $3,642,520 and $4,437,291 respectively. Unamortized computer  software cost as at December 31, 2005 and 2006 amounted to $7,393,116  and $7,399,398 respectively. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-18

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 
| **9**      | ** **                                                                          | **Goodwill and intangible assets** |
|------------|-------------------------------------------------------------------------------------|------------------------------------|
| ** ** | ** **                                                                          | ** **                         |
| 9.1.1      | Intangible  assets as at December 31, 2005 and 2006 consists of the following: |

 
| **As of December 31,** | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|---------------------------------------|------------|------------|----------------|------------|------------|
| ** **                            | ** ** | ** ** | ** **     | ** ** | ** ** |
| Customer related  intangibles         |       | $          | 11,176,500     |       | $          | 11,176,500 |   |
| Technology  related intangibles       |       | —     |           | 497,879    |       |
| Less:  Accumulated amortization       |       | (1,018,435 | )              | (1,986,936 | )          |
| ** **                            | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **$**      | **10,158,065** | ** ** | **$**      | **9,687,443** | ** ** |

 
| 9.1.2 | Amortization  for the years ended December 31, 2004, 2005 and 2006 amounted to  $210,869, $748,023 and $968,501 respectively.   The estimated amortization for the intangible assets, for the next  five years would be as follows: |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **   | ** ** | **2007**  | ** ** | **2008**  | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011**  | ** ** |
|--------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Amortization |       | 1,092,723 |       | 1,183,638 |       | 1,231,260 |       | 1,231,260 |       | 1,173,174 |       |

 
| 9.1.3 | The  movement in goodwill balance is given below: |
|-------|---------------------------------------------------|

 
| ** **                                                                                 | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|
| Balance at  beginning of the year                                                          |       | $          | 24,677,771     |       | $          | 27,987,198 |   |
|                                                                                       |       |       |           |       |       |
| Add: Additional  goodwill arising on account of contingent consideration for Patni Telecom |       | 5,578,772  |           | 12,184,832 |       |
| Add: Addition to  goodwill as per final purchase price allocation of Patni Telecom         |       | 649,022    |           | —     |       |
| Less: Reduction  of valuation allowance on deferred tax assets recognised on Patni Telecom |       | (2,918,367 | )              | —     |       |
| Less: Tax  benefit on incentive stock option of Patni Telecom                              |       | —     |           | (340,366   | )          |
| Balance at end  of the year                                                                | ** ** | **$**      | **27,987,198** | ** ** | **$**      | **39,831,664** | ** ** |

 
| 9.1.4 | Goodwill  as of December 31, 2005 and 2006 has been allocated to the following  reportable segments: |
|-------|-----------------------------------------------------------------------------------------------------------|

 
| **Segment**         | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|---------------------|------------|------------|----------------|------------|------------|
| Financial  services |       | $          | 2,594,374      |       | $          | 2,594,374 |   |
| Telecom services    |       | 25,392,824 |           | $          | 37,237,290 |   |
| **Total**           | ** ** | **$**      | **27,987,198** | ** ** | **$**      | **39,831,664** | ** ** |

 
| **10.** | **Change in estimate** |
|---------|------------------------|

 

During2006, the Company reached a settlement with the Internal Revenue Service (the “IRS”)relating to its tax returns of its U.S. operations (Patni USA and its USbranch) for fiscal years 2001 and 2002. The settlement addressed transferpricing, branch tax matters and payroll taxes.

 

TheCompany was unable to substantiate to the IRS that returns pertaining to itsU.S. branch for the years ended March 31, 2002 and 2003 were filed within18 months from the respective due dates and hence were deemed as delinquentreturns by the IRS. Accordingly, the IRS disallowed all of the deductions onthe branch income tax returns and assessed additional income tax obligations ofU.S. $15.2 million. Delinquenttax returns were treated as errors in computation of income taxes for the yearsin which such tax returns were due for filing under the IRS rules and theCompany restated its 2003 and 2004 financial statements for such errors.

 

TheCompany reviewed the adequacy of the previously established tax exposurereserves with respect to prior years in July 2006 in light of certainpositions taken by the IRS during the settlement for 2001 and 2002 and based onsuch positions, the Company revised its estimate for tax exposure relating tovarious income tax matters along with related adjustments to accrued interest.

 

F-19

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 

TheIRS settlement for 2001 and 2002 also covered payroll tax matters for which aprovision had previously been established. The settlement resulted in a liability that was less than the amountpreviously provided for, in part due to the liability being offset by anincrease in income tax liability during settlement. As a result, the Companyreduced its accrual for payroll taxes exposure during 2006 with a consequentialreversal of the related deferred tax asset. These revisions to the establishedtax exposure reserves represented a revision to previous reserve estimates, andaccordingly, such amounts have been recorded as part of the consolidatedstatement of income for the Company’s fiscal year ended December 31, 2006as a change in estimate as follows:

 
| Reduction of  accrual for payroll taxes (1) |       | $          | (9,041,958     | )          |
|---------------------------------------------|------------|------------|----------------|------------|
|                                        |       |       |           |       |
| Increase in  interest expense               |       | 2,600,608  |           |
|                                        |       |       |           |
| Increase in  other expense (2)              |       | (3,743,032 | )              |
|                                        |       |       |           |
| Increase in  income taxes – current    |       | 26,928,920 |           |
|                                        |       |       |           |
| Increase in  income taxes – deferred   |       | 3,421,312  |           |
| ** **                                  | ** ** | **$**      | **20,165,850** | ** ** |

 

----

| (1)  Included  under cost of revenues     |
|-----------------------------------------------------|
| (2)  Included  under other income/expense |

 

Therespective annual amounts with respect to the above amount are shown in thetable provided below:

 
| **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **Total**  | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|------------|------------|
| $        | (1,248,987 | )        | $          | (372,881 | )          | $        | 2,572,523  |     | $          | 10,862,317 |       | $ | 8,352,878 |   | $ | 20,165,850 |   |
|          |            |          |            |          |            |          |            |          |            |            |            |  |  |  |  |  |  |

 
| **11**     | ** ** | **Accrued expenses**                        |
|------------|------------|---------------------------------------------|
| ** ** | ** ** | ** **                                  |
| ** ** | ** ** | Accrued  expenses consist of the following: |

 
| **As of December 31,** | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|---------------------------------------|------------|------------|----------------|------------|------------|
| Employee costs                        |       | $          | 14,105,923     |       | $          | 21,427,493 |   |
| Subcontractor  accruals               |       | 3,996,007  |           | 5,029,497  |       |
| Professional  fees payable            |       | 1,260,231  |           | 1,512,893  |       |
| Others                                |       | 6,869,371  |           | 15,337,618 |       |
| ** **                            | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **$**      | **26,231,532** | ** ** | **$**      | **43,307,501** | ** ** |

 

F-20

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 
| **12**     | **Other liabilities**                        |
|------------|----------------------------------------------|
| ** ** | ** **                                   |
| ** ** | Other  liabilities consist of the following: |

 
| **As of December 31,**                   | ** **                                              | **2005**    | ** **     | **2006**    | ** **  |
|---------------------------------------------------------|---------------------------------------------------------|-------------|----------------|-------------|-------------|
| Deferred revenue                                        |                                                    | $           | 2,027,444      |        | $           | 1,095,217 |   |
| Provision for  leave encashment                         |                                                    | 10,092,730  |           | 12,321,032  |        |
| Provision for  retirement benefits                      |                                                    | 6,284,868   |           | 8,073,273   |        |
| Capital  expenditure payable                            |                                                    | 1,778,355   |           | 5,524,966   |        |
| Payroll tax  liability                                  |                                                    | 22,122,868  |           | 6,481,233   |        |
| Interest on  corporate taxes and other related expenses |                                                    | 6,783,211   |           | 5,744,001   |        |
| Advance from  customers                                 |                                                    | 1,389,957   |           | 185,968     |        |
| Others                                                  |                                                    | 6,654,123   |           | 6,920,116   |        |
| ** **                                              | ** **                                              | **$**       | **57,133,556** | ** **  | **$**       | **46,345,806** | ** ** |
| ** **                                              | ** **                                              | ** **  | ** **     | ** **  | ** **  | ** ** | ** ** |
| Less :                                                  | Other Current  liabilities                              |        |           |        |        |   |
|                                                    | Deferred revenue                                        |        | (2,027,444     | )           | (1,095,217  | ) |
|                                                    | Provision for  leave encashment                         |        | (10,092,730    | )           | (12,321,032 | ) |
|                                                    | Capital  expenditure payable                            |        | (1,778,355     | )           | (5,524,966  | ) |
|                                                    | Payroll tax  liability                                  |        | (22,122,868    | )           | (6,481,233  | ) |
|                                                    | Interest on  corporate taxes and other related expenses |        | (6,783,211     | )           | (5,744,001  | ) |
|                                                    | Advance from  customers                                 |        | (1,389,957     | )           | (185,968    | ) |
|                                                    | Others                                                  |        | (6,570,447     | )           | (6,869,329  | ) |
|                                                    |                                                    | (50,765,012 | )              | (38,221,746 | )           |
| Other  liabilities                                      | ** **                                              | **$**       | **6,368,544**  | ** **  | **$**       | **8,124,060** | ** ** |

** **
| **13**     | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | **Leases** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |
| 13.1.1     | Patni  acquires certain vehicles under capital lease for a non-cancelable period of  4 years. The gross amount recorded under such capital lease was  $1,143,504 with accumulated depreciation of $475,198 as at December 31,  2005. The gross amount recorded under such capital lease is $1,255,948 with  accumulated depreciation of $556,251 as at December 31, 2006.The  depreciation expense in respect of these assets aggregated $254,201, $321,127  and $264,623 for the years ended December 31, 2004, 2005 and 2006  respectively. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 13.1.2     | Patni  USA has operating lease agreements, primarily for leasing office space, that  expire over the next 1-7 years. These leases generally require Patni USA to  pay certain executory costs such as taxes, maintenance and insurance.                                                                                                                                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 13.1.3     | Patni  has operating lease agreements, primarily for leasing office and residential  premises. These agreements provide for cancellation by either party with a  notice period ranging from 30 days to 120 days, after the initial  lock-in period, if any. Some leases contain a clause for renewal of the lease  agreements. Some leases provide for annual renewal of the lease payments.                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 13.1.4     | Patni  Telecom and its subsidiaries have operating leases for office space, that  expire over the next 1-4 years. These agreements provide for cancellation by  either party with a notice period ranging from 30 days to 120 days,  after the initial lock-in period, if any.                                                                                                                                                                                                                                                                               |

 

F-21

----

 

** **

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| 13.1.5 | Future  minimum lease payments under non-cancelable operating leases (with initial or  remaining lease terms in excess of one year) and future capital lease  payments as of December 31, 2006 are as follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **                                                        | ** ** | **Capital leases** | ** ** | **Operating  leases** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | ** **              | ** ** | ** **            | ** ** |
| 2007                                                              |       | $                       | 320,593    |                  | $          | 4,937,290 |   |
| 2008                                                              |       | 237,356                 |       | 3,094,703             |       |
| 2009                                                              |       | 132,578                 |       | 2,283,112             |       |
| 2010                                                              |       | 34,119                  |       | 1,223,826             |       |
| 2011                                                              |       | —                  |       | 280,632               |       |
| beyond 2011                                                       |       | —                  |       | —                |       |
| Total minimum  lease payments                                     |       | 724,646                 |       | $                     | 11,819,563 |   |
| Less: Amount  representing interest                               |       | (32,855                 | )          |                  |       |
| Present value of  net minimum capital lease payments              |       | 691,791                 |       |                  |       |
| Less: Current  installments of obligations under capital leases   |       | (301,138                | )          |                  |       |
| Obligations  under capital leases, excluding current installments |       | $                       | 390,653    |                  |       |   |

 
|   | The  related assets for capital leases are included under vehicles in property,  plant and equipment in the consolidated balance sheets.                                                                         |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                             |
| 13.1.6 | Rental  expense for all operating leases for the years ended December 31, 2004,  2005 and 2006 was $6,801,506, $10,228,316 and $12,510,436 respectively.                                                    |
|   |                                                                                                                                                                                                             |
| 13.1.7 | Commencing  2005, Patni USA has sublease agreements that expire over the next 2 years.  The total rental income from these offices during the year 2006 is $113,152.  The future sub lease income is as follows: |

 
| 2007 |   | $      | 106,606 |   |
|------|--------|--------|---------|--------|
| 2008 |   | 17,994 |    |

 
| **14**     | **Derivatives financial instruments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 14.1.1     | The  Company periodically enters into foreign currency forward exchange contracts  to hedge inter company receivables, both anticipated and firm commitments,  denominated in the United States dollar. These contracts reduce foreign  currency risk caused by changes in exchange rates and are used to hedge these  inter company receivables, generally for periods up to 12 months. At  December 31, 2006, the Company’s forward contracts have expiration dates  which range from one to thirteen months.                                                                                                       |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       | Since  there is a direct relationship between the forward contracts and the currency  denomination of the underlying transaction, such forward contracts are highly  effective in hedging the cash flows of the Company’s inter company  receivables related to transactions denominated in the United States dollar.  These forward contracts meet the criteria for cash flow hedge accounting  treatment and accordingly, gains or losses, are included in other  comprehensive income (loss) and are recognized in the consolidated statement  of income based on occurrence of the underlying third party transaction. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       | For  forward contracts designated as a cash flow hedge, the hedge effectiveness is  assessed based on changes in fair value attributable to changes in spot  prices and accordingly, the changes in the fair value of the contract related  to the changes in the difference between the spot price and the forward or  futures price would be excluded from assessment of hedge effectiveness and  recognised in consolidated statements of income together with any ineffective  portion of the hedge.                                                                                                                        |

 

F-22

----

 

**PatniComputer Systems Limited and subsidiaries**

** **

**Notesto the consolidated financial statements (Continued)**

 
|   | At  December 31, 2006, the Company had $1,505,009 of net gains related to  cash flow hedges deferred in Accumulated Other Comprehensive Income. The  Company has also entered into net written options, which do not qualify for  hedge accounting and are accordingly recognised at fair value with gains or  losses included in foreign exchange (gain)/loss in the consolidated statements  of income. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 14.1.2 | The  following table presents the aggregate contracted principal amounts of the  Company’s derivative contracts outstanding:                                                                                                                                                                                                                                                                              |

 
| ** **                                    | ** ** | **Currency** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|--------------|------------|----------|------------|----------|------------|
| Forward  contracts (sell)                     |       | USD          |       | $        | 77,000,000 |     | $          | 182,564,103 |   |
| Foreign currency  written options, net (sell) |       | USD          |       | —   |       | $        | 19,500,000 |   |
|                                               |            |              |            |          |            |          |            |  |  |

 
| **15**       | **Shareholders’ equity**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *** *** | ***Common shares***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 15.1.1       | The  Company has only one class of equity shares. For all matters submitted to  vote in the shareholders’ meeting, every holder of equity shares (except  holders of American Depository Shares - ADSs), as reflected in the records of  the Company on the date of the shareholders meeting shall have one vote in  respect of each share held. In the event of liquidation of the affairs of the  Company, all preferential amounts, if any, shall be discharged by the  Company. The remaining assets of the Company after such discharge shall be  distributed to the holders of equity shares in proportion to the number of  shares held by them. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 15.1.2       | In  February 2004, pursuant to an initial Public Offering in India (‘IPO’),  the Company has issued 13,415,200 common shares for a net proceeds of  $64,268,351 (after adjusting for direct expenses relating to IPO of  $3,889,281).                                                                                                                                                                                                                                                                                                                                                                                                         |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 15.1.3       | In  December 2005, pursuant to an Initial Public Offering of American  Depositary Shares, the Company issued 6,156,250 ADSs (12,312,500 common  shares) for a net proceeds of $117,021,852 (after adjusting for direct  expenses relating to ADSs of $8,196,274). The common shares represented by  the ADSs are similar to other common shares except for voting rights. Under  the depository agreement, the depository of ADSs shall vote as directed by  the Board of Directors of the Company.                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *** *** | ***Retained earnings and dividends***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 15.1.4       | Retained  earnings as of December 31, 2005 and 2006 include profits aggregating  $9,027,884, which are not distributable as dividends under Indian Companies  Act, 1956 (Companies Act).                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 15.1.5       | The  ability of Patni to declare and pay dividend under the Companies Act, is  determined by its distributable profits as shown by its statutory accounts  prepared in accordance with Indian GAAP. When Patni wishes to declare  dividends, it is required as per the Companies Act, to transfer up to 10% of  its net income (after the deduction of any accumulated deficit) computed in  accordance with local regulations to a general reserve before a dividend can  be declared. Also, Indian law on foreign exchange governs the remittance of  dividends outside India.                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **16**       | **Employee stock compensation plans**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** **   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 16.1.1       | On  June 30 2003, Patni established the ‘Patni ESOP 2003’ plan (‘the plan’).  Under the plan, the Company is authorized to issue up to 11,142,085 equity  shares to eligible employees. Employees covered by the Plan are granted an  option to purchase shares of the Company subject to the requirements of  vesting. The options vest in a graded manner over four years with 25% of the  options vesting at the end of each year. The options can be exercised within  five years from the date of vesting. A compensation committee constituted by  the Board of Directors of the Company administers the plan.                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 16.1.2       | The  weighted average grant date fair values of options granted during the year  ended December 31, 2004, 2005 and 2006 are $2.67, $3.10 and $3.85  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

F-23

----

 

**Patni Computer Systems Limitedand subsidiaries**

 

**Notes to the consolidatedfinancial statements (Continued)**

 
| 16.1.3 | Stock  options activity under the plan is as follows: |
|--------|-------------------------------------------------------|

 
| ** **                                | ** ** | **Year ended December 31, 2005** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **Exercise  price**                                  | ** ** | **Shares  arising out of  options** | ** ** | **Weighted  average  remaining  contractual  life (months)** | ** ** |
| ** **                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at  the beginning of the year |       | $3.16                                                |       | 2,352,015 |   | 75 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,850,632 |   | 87 |   |
| Granted during  the year                  |       | $8.71-$10.25                                         |       | 860,710 |   | 90 |   |
| Forfeited during  the year                |       | $3.16                                                |       | (159,400 | ) | — |   |
|                                      |       | $7.35                                                |       | (248,625 | ) | — |   |
|                                      |       | $8.71                                                |       | (9,000 | ) | — |   |
| Exercised during  the year                |       | $3.16                                                |       | (433,065 | ) | — |   |
|                                      |       | $7.35                                                |       | (28,000 | ) | — |   |
| Outstanding at  the end of the year       |       | $3.16                                                |       | 1,759,550 |   | 67 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,574,007 |   | 75 |   |
|                                      |       | $8.71-$10.25                                         |       | 851,710 |   | 86 |   |
| Exercisable at  the end of the year       |       | $3.16                                                |       | 663,243 |   | 53 |   |
|                                      |       | $5.51-$7.35                                          |       | 622,502 |   | 57 |   |

 

F-24

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **16** | **Employee stock compensation plans *(******Continued)*** |
|--------|-----------------------------------------------------------|

 
| ** **                                | ** ** | **Year ended December 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **Exercise price**                              | ** ** | **Shares  arising out of  options** | ** ** | **Weighted  average  remaining  contractual  life (months)** | ** ** |
| Outstanding at  the beginning of the year |       | $3.16                                                |       | 1,759,550 |   | 67 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,574,007 |   | 75 |   |
|                                      |       | $8.71-$10.25                                         |       | 851,710 |   | 86 |   |
| Granted during  the year                  |       | $7.29-$10.93                                         |       | 1,968,750 |   | 90 |   |
| Forfeited during  the year                |       | $3.16                                                |       | (101,650 | ) | — |   |
|                                      |       | $7.35                                                |       | (254,560 | ) | — |   |
|                                      |       | $8.71-$10.93                                         |       | (189,600 | ) | — |   |
| Exercised during  the year                |       | $3.16                                                |       | (414,934 | ) | — |   |
|                                      |       | $5.51-$7.35                                          |       | (68,520 | ) | — |   |
| Outstanding at  the end of the year       |       | $3.16                                                |       | 1,242,966 |   | 56 |   |
|                                      |       | $5.51-$7.35                                          |       | 2,420,927 |   | 65 |   |
|                                      |       | $8.37-$10.93                                         |       | 2,460,860 |   | 81 |   |
| Exercisable at  the end of the year       |       | $3.16                                                |       | 727,016 |   | 47 |   |
|                                      |       | $5.51-$7.35                                          |       | 1,108,256 |   | 51 |   |
|                                      |       | $8.71-$10.25                                         |       | 186,149 |   | 56 |   |

 
| 16.1.4 | The  exercise price and weighted average remaining contractual life of stock  options outstanding at the end of the period are as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

 
| **Year ended December 31, 2006**  | ** ** |
|-------------------------------------------------------|------------|
| **Shares arising out of options** | ** ** | **Exercise   Price** | ** ** | **Weighted average  remaining contractual  life (months)** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1,242,966                                             |       | $ |  3.16 |   | 56 |   |
| 90,000                                                |       | $ |  5.51 |   | 62 |   |
| 2,160,927                                             |       | $ |  7.37 |   | 63 |   |
| 158,000                                               |       | $ |  8.71 |   | 69 |   |
| 573,110                                               |       | $ |  10.25 |   | 75 |   |
| 249,000                                               |       | $ |  10.93 |   | 78 |   |
| 290,000                                               |       | $ |  10.27 |   | 81 |   |
| 350,000                                               |       | $ |  8.37 |   | 82 |   |
| 170,000                                               |       | $ |  7.29 |   | 84 |   |
| 840,750                                               |       | $ |  8.40 |   | 87 |   |
| 61,24,753                                             |       |   |   |   |   |

 
| **17**     | **Income Tax**                                                                                     |
|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                         |
| 17.1.1     | Total  income tax for the year ended December 2004, 2005 and 2006 were  allocated as follows: |

 
| **For the years ended December 31,** | ** ** | **2004**   | ** **     | **2005**   | ** ** | **2006**       | ** ** |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| ** **                                                    | ** ** | ** ** | ** **     | ** ** | ** ** | ** **     | ** ** |
| Income from  continuing operations                            |       | $          | 12,886,362     |       | $          | 13,802,583     |       | $ | 47,691,763 |   |
| Shareholders’  equity, for                               |       |       |           |       |       |           |       |
| - unrealized  holding gain/loss on investment securities      |       | 142,362    |           | 261,520    |       | 1,076,106      |       |
| - pension                                                     |       | 153,253    |           | 194,848    |       | (305,835       | )          |
| - gratuity                                                    |       |       |           |       |       | (17,820        | )          |
| - tax benefit  arising on exercise of stock options           |       | —     |           | (136,816   | )          | 317,028        |       |
|                                                          |       |       |           |       |       |           |       |
| Goodwill and  intangible assets                               |       | —     |           | (3,351,045 | )          | (340,366       | )          |
| **Total**                                                     | ** ** | **$**      | **13,181,977** | ** ** | **$**      | **10,771,090** | ** ** | **$** | **48,420,876** | ** ** |

 

F-25

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **17** | **Income Tax*****(Continued)*** |
|--------|---------------------------------|

 
| 17.1.2 | Income  tax expense attributable to income from continuing operations consists of the  following: |
|--------|---------------------------------------------------------------------------------------------------|

 
| **For the years ended December 31,** | ** ** | **2004**   | ** **     | **2005**   | ** ** | **2006**       | ** ** |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| **Current  taxes**                                            | ** ** | ** ** | ** **     | ** ** | ** ** | ** **     | ** ** |
| Domestic                                                      |       | $          | 148,501        |       | $          | 1,787,316      |       | $ | 1,655,461 |   |
| Foreign                                                       |       | 14,675,569 |           | 13,904,560 |       | 41,691,833     |       |
|                                                          |       | $          | 14,824,070     |       | 15,691,876 |           | 43,347,294 |   |
| **Deferred  taxes**                                           | ** ** | ** ** | ** **     | ** ** | ** ** | ** **     | ** ** |
| Domestic                                                      |       | (303,711   | )              | (91,396    | )          | (336,467       | )          |
| Foreign                                                       |       | (1,633,997 | )              | (1,797,897 | )          | 4,680,936      |       |
|                                                          |       | (1,937,708 | )              | (1,889,293 | )          | 4,344,470      |       |
| **Total**                                                     | ** ** | **$**      | **12,886,362** | ** ** | **$**      | **13,802,583** | ** ** | **$** | **47,691,763** | ** ** |

 
|   | Pre-tax  income from domestic and foreign operations is set out below: |
|--------|------------------------------------------------------------------------|

 
| **For the years ended December 31,** | ** ** | **2004**   | ** **     | **2005**   | ** ** | **2006**       | ** ** |
|---------------------------------------------------------------|------------|------------|----------------|------------|------------|----------------|------------|
| **Pre-tax  income**                                           | ** ** | ** ** | ** **     | ** ** | ** ** | ** **     | ** ** |
| Domestic                                                      |       | 55,377,936 |           | 58,644,162 |       | 71,188,552     |       |
| Foreign                                                       |       | 4,056,225  |           | 16,025,097 |       | 35,753,981     |       |
| **Total**                                                     | ** ** | **$**      | **59,434,161** | ** ** | **$**      | **74,669,259** | ** ** | **$** | **106,942,533** | ** ** |
|                                                               |            |            |                |            |            |                |            |  |  |  |

 
| 17.1.3 | The  tax effect of temporary differences that give rise to significant portion of  deferred tax assets and liabilities are presented below: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **                                                                   | ** ** | ** ** | ** ** | **2005**   | ** **     | **2006**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|----------------|------------|------------|
| **Deferred  tax assets:**                                                    |       |       |       |       |           |       |       |
| Accrued expenses  and provisions                                             |       |       |       | $          | 6,812,271      |       | $          | 8,794,129 |   |
| Accounts  receivable                                                         |       |       |       | 662,329    |           | 867,320    |       |
| Deferred revenue                                                             |       |       |       | 489,119    |           | 146,010    |       |
| Carry forward  business losses                                               |       |       |       | 2,797,346  |           | 501,719    |       |
| Payroll taxes  and interest on payroll and corporate taxes                   |       |       |       | 9,843,043  |           | 4,394,379  |       |
| ESOP  compensation costs                                                     |       |       |       | —     |           | 705,135    |       |
| Others                                                                       |       |       |       | 57,104     |           | 1,015,345  |       |
| Gross deferred  assets                                                       |       |       |       | 20,661,212 |           | 16,424,037 |       |
| Less: Valuation  allowance                                                   |       |       |       | —     |           | (501,719   | )          |
| Total deferred  tax assets                                                   |       |       |       | $          | 20,661,212     |       | $          | 15,922,318 |   |
| Deferred tax  liabilities:                                                   |       |       |       |       |           |       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |       |       |       | (1,000,371 | )              | (846,115   | )          |
| Property, plant  and equipment                                               |       |       |       | (1,078,576 | )              | (855,386   | )          |
| Undistributed  earnings of US branch                                         |       |       |       | (1,718,140 | )              | (1,892,887 | )          |
| Unrealised gain  on available for sale securities                            |       |       |       | (436,730   | )              | (1,520,939 | )          |
| Intangible  assets                                                           |       |       |       | (4,063,260 | )              | (3,695,708 | )          |
| Tax deduction  available for notional interest deduction                     |       |       |       |       |           | (321,119   | )          |
| Others                                                                       |       |       |       | (192,253   | )              | (32,383    | )          |
| Total deferred  tax liabilities                                              |       |       |       | (8,489,330 | )              | (9,164,537 | )          |
| Net Deferred tax  assets                                                     |       |       |       | **$**      | **12,171,882** | ** ** | **$**      | **6,757,781** | ** ** |
| **Classified  as**                                                           |       |       |       | ** ** | ** **     | ** ** | ** ** |
| **Deferred  tax assets**                                                     |       |       |       | ** ** | ** **     | ** ** | ** ** |
| Current                                                                      |       |       |       | $          | 13,722,884     |       | $          | 10,240,528 |   |
| Non current                                                                  |       |       |       | 3,401,766  |           | 370,529    |       |
| **Deferred  tax liabilities**                                                |       |       |       | ** ** | ** **     | ** ** | ** ** |
| Current                                                                      |       |       |       | 193,807    |           | 108637     |       |
| Non current                                                                  |       |       |       | 4,758,961  |           | 3,744,639  |       |
| Net Deferred tax  assets                                                     |       |       |       | **$**      | **12,171,882** | ** ** | **$**      | **6,757,781** | ** ** |

 

F-26

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **17** | **Income Tax*****(Continued)*** |
|--------|---------------------------------|

 
| 17.1.4 | In  assessing the realisability of deferred tax assets, management considers  whether it is more likely than not, that some portion, or all, of the  deferred tax assets will not be realised. The ultimate realisation of  deferred tax assets is dependent upon the generation of future taxable income  during the periods in which the temporary differences and loss carryforwards  are deductible. Management considers the reversal of taxable temporary  differences, the projected future taxable income, tax planning strategies and  impact of tax exemptions currently available to the company, in making this  assessment. Based on the level of historical taxable incomes over the periods  in which the deferred tax assets are deductible, management believes that it  is more likely than not, the Company will realise the benefits of those  deductible differences, net of existing valuation allowances. Taxable income  for the years 2004, 2005 and 2006 aggregated $8,031,173, $16,336,603 and  $29,143,691 respectively. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 17.1.5 | Deferred  tax liability in respect of undistributed earnings of Patni’s foreign  subsidiaries as of 2005 and 2006 aggregating $4,236,903 and $4,688,485  respectively has not been recognised in the financial statements, as such  earnings are considered to be indefinitely re-invested. As of December 31,  2006, the undistributed earnings of these subsidiaries were approximately  $23,442,425.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 17.1.6 | The  net change in the year 2004 is attributable to valuation allowance on carry  forward losses of Patni Telecom (which was acquired during the year 2004)  aggregating $2,924,898.  This has been  partly offset by tax benefits of losses utilised during the year aggregating  $81,765.  The net change in the year  2005 is attributable to reversal of valuation allowance on carry forward  losses of Patni Telecom (which was acquired during the year 2004) aggregating  $2,918,367 and reversal of valuation allowance of $67,623 on impairment of  leasehold land. The net change in valuation allowance in the year 2006 is  mainly on account of deferred tax created on business loss of Japan  branch  for the year 2006 aggregating  to $501,719.                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 17.1.7 | The  reported income tax expense attributable to income from continuing operations  differed from amounts computed by applying the enacted tax rate to income  from continuing operations before income-taxes as a result of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 
| ** **                                                        | ** ** | **2004**    | ** **     | **2005**    | ** ** | **2006**       | ** ** |
|-------------------------------------------------------------------|------------|-------------|----------------|-------------|------------|----------------|------------|
| Income before income  taxes                                       |       | $           | 59,434,161     |        | $          | 74,669,259     |       | 106,942,533 |   |
| Weighted average  enacted tax rate in India                       |       | 36.41       | %              | 34.39       | %          | 33.66          | %          |
| Computed  expected income tax expense                             |       | $           | 21,639,978     |        | $          | 25,680,625     |       | $ | 35,996,857 |   |
| Effect of:                                                        |       |        |           |        |       |           |       |
| Income exempt  from tax                                           |       | (21,826,422 | )              | (21,756,426 | )          | (29,673,705    | )          |
| Changes in  valuation allowance                                   |       | (81,765     | )              | (67,623     | )          | 501,719        |       |
| Non deductible  expenses                                          |       | 1,187,196   |           | 1,866,968   |       | 5,767,090      |       |
| US State taxes,  net of federal tax benefit                       |       | (302,726    | )              | 787,336     |       | 1,698,868      |       |
| Branch taxes                                                      |       | 12,083,807  |           | 6,461,722   |       | 5,928,986      |       |
| Foreign income  taxed at different rates                          |       | (78,857     | )              | (105,635    | )          | (12,403        | )          |
| Change in  statutory tax rate on deferred taxes                   |       | 2,057       |           | (16,432     | )          | —         |       |
| Profit on sale  of investments taxed at other than statutory rate |       | —      |           | (261,606    | )          | (571,740       | )          |
| Change to prior  year estimates                                   |       | —      |           | —      |       | 27,401,735     |       |
| Others                                                            |       | 263,094     |           | 1,213,654   |       | 654,356        |       |
| **Reported  income tax expenses**                                 | ** ** | **$**       | **12,886,362** | ** **  | **$**      | **13,802,583** | ** ** | **$** | **47,691,763** | ** ** |

 
|   | As discussed in Note  10, during 2006, the Company reached a settlement with the Internal Revenue  Service (the “IRS”) relating to its tax returns of its US operations (Patni  USA and its US Branch) for fiscal years 2001 and 2002. The settlement  addressed transfer pricing and branch tax matters.  Following the settlement, the Company  revised its tax contingency reserves for open tax years and recorded  additional income tax expense of $26,928,920. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-27

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **17** | **Income Tax*****(Continued)*** |
|--------|---------------------------------|

 
| 17.1.8     | Upon acquisition of  Patni Telecom, the Company was entitled to utilize tax benefits on carry  forward business losses of Patni Telecom. Based on preliminary projections of  future taxable income and tax planning strategies, management believed that  there existed sufficient uncertainty regarding realization of tax benefits on  the carry forward losses. Consequently, the Company recorded a valuation  allowance for the carry forward business losses of Patni Telecom. In 2005,  the Company evaluated the expected realisation of such carry forward losses  and available tax planning strategies and believed that the Company would  make sufficient profits in future years to set off the carry forward losses.  Accordingly, the valuation allowance has been reversed and adjusted against  goodwill.                                                                                                                                                                                        |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 17.1.9     | A substantial portion  of profits of the group’s India operations is exempt from Indian income tax,  being profit from undertakings situated at Software Technology Parks. Under  the tax holiday, the tax payer can utilize exemption of profits from income  taxes for a period of ten consecutive years. The Company has opted for this  exemption for undertakings situated in Software Technology Parks and these exemptions  expire on various dates between years 2006 and 2009. The Company also avails  benefit for  Income tax for their  export operations. This exemption relating to export operations expires in a  phased manner over a period of five financial years commencing from  April 1, 2000. The aggregate effect on net income of the tax holiday and  export incentive scheme were   $20,572,502, $18,957,774 and $25,304,980 for 2004, 2005 and 2006  respectively. Further, the per share effect was $0.17 ,$0.15 and $0.18 for 2004,  2005 and 2006 respectively. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 17.1.10    | During the year 2005,  the Company has sold leasehold land for a consideration of $3,768,186 and  recognised a gain on sale of $3,285,169. As required by the Indian Income Tax  law, the Company has reinvested $3,048,092 out of such proceeds from this  sale in prescribed securities for a period of   three years so as to realize the gain on sale in a tax free  manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **18**     | **Retirement  benefits to employees**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | ***Gratuity benefits***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 18.1.1     | In accordance with the  Payment of Gratuity Act, 1972, Patni provides for gratuity, a defined  retirement plan covering all employees. The plan provides a lump sum payment  to vested employees at retirement or termination of employment based on the  respective employee’s defined portion of last salary and the years of  employment with the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 18.1.2     | Patni contributes each  year to a gratuity fund based upon actuarial valuations performed by an  actuary. The fund is administered by Patni through a trust set up for the  purpose. All assets of the plan are owned by the trust and comprise of  approved debt and other securities and deposits with banks. By statute, the  trust is required to invest a minimum of 25% of its corpus in Central  Government securities, 15% in State Government securities and 30% in Public  Sector / Financial Institutions / Bank bonds. The trust can invest the  remaining 30% of its corpus in any of the above specified categories.  Further, 10% of its corpus can be invested in private sector / bond  securities which are rated investment grade from at least two rating  agencies.                                                                                                                                                                                                                            |

 

F-28

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **18** | **Retirement  benefits to employees*****(Continued)*** |
|--------|--------------------------------------------------------|

 
| 18.1.3 | With  regard to Patni India and Patni Telecom India’s (formerly known as Cymbal  Information Services Pvt. Ltd.) Gratuity Plan, the following table sets forth  the plan’s funded status and amounts recognized in the Company’s consolidated  balance sheets. Measurement dates used to measure fair value of plan assets  and benefit obligation is  December 31. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **At December 31,**                                               | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Change  in benefit obligation**                                           |       |      |       |      |       |
| Projected  benefit obligation (“PBO”) at January 1,          |       | $         | 4,240,028  |      | $          | 4,307,971 |   |
| Service cost                                                                |       | 919,286   |       | 982,652   |       |
| Interest cost                                                               |       | 302,722   |       | 329,613   |       |
| Translation  loss/(gain)                                                    |       | (164,522  | )          | 178,931   |       |
| Actuarial loss                                                              |       | 612,287   | )          | (583,370  | )          |
| Benefits paid                                                               |       | (377,256  | )          | (732,815  | )          |
| PBO at  December 31,                                                   |       | 4,307,971 |       | 4,482,982 |       |
| Fair value of  plan assets as at January 1,                            |       | 3,629,830 |       | 4,790,090 |       |
| Actual return on  plan assets                                               |       | 257,210   |       | 273,829   |       |
| Employer  contributions                                                     |       | 1,428,962 |       | 873,430   |       |
| Benefits paid                                                               |       | 77,256    | )          | (732,815  | )          |
| Translation gain                                                            |       | (148,656  | )          | 104,277   |       |
| Plan assets at  December 31,                                           |       | 4,790,090 |       | 5,308,811 |       |
| Funded status                                                               |       | 482,119   |       | 825,829   |       |
| Unrecognized  actuarial loss                                                |       | 960,409   |       | —    |       |
| Net amount  recognized                                                      |       | 1,442,528 |       | 825,829   |       |
| Accumulated  benefit obligation                                             |       | 2,259,265 |       | 2,353,522 |       |
| Amounts  recognized in the consolidated balance sheets consists of:         |       |      |       |      |       |
| Prepaid benefit  cost (included in ‘other assets’)                |       | $         | (1,442,528 | )         | $          | (918,045 | ) |
| Provision for  Gratuity (included in ‘other current liabilities’) |       | —    |       | 1,513     |       |
| Provision for  Gratuity (included in ‘other liabilities’)         |       | —    |       | 90,703    |       |
|                                                                        |       | $         | (1,442,528 | )         | $          | (825,829 | ) |

 
| 18.1.4 | Key  weighted average assumptions used to determine the benefit obligation were as  follows: |
|--------|----------------------------------------------------------------------------------------------|

 
| ** **    | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Discount rate |       | 8.0      | %          | 8.85     | %          |

 
|   | For  the actuarial valuation at December 31, 2006, compensation levels have  been assumed to increase at  15% per  annum for the first year, 12.5% per annum for the next 3 years and 7% per  annum thereafter. For the actuarial valuation at December 31, 2005,  compensation levels have been assumed to increase at  15% per annum for the first year, 12.5% per  annum for the next year, 10% per annum for next five years and 7% per annum  thereafter. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The  expected rate of return on assets in future is considered to be 7.5%. This is  based on the expectation of the average long-term rate of return to prevail  over the next 15 to 20 years on the type of investments prescribed as per the  statutory pattern of investments.                                                                                                                                                                                                  |

 
| 18.1.5 | The  composition of plan assets is detailed below: |
|--------|----------------------------------------------------|

 
| **As of December 31,**                 | ** ** | **2005**  | ** **    | **%**      | ** ** | **2006**   | ** **    | **%**      | ** ** |
|-------------------------------------------------------|------------|-----------|---------------|------------|------------|------------|---------------|------------|------------|
| Central  Government Securities                        |       | 148,186   |          | 3.1        |       | 133,800    |          | 2.5        |       |
| Investment in  Government Securities based funds      |       | 3,478,625 |          | 72.6       |       | 4,201,692  |          | 79.1       |       |
| State Government  Securities                          |       | 42,325    |          | 0.9        |       | 55,271     |          | 1.0        |       |
| Public Sector /  Financials Institutions / Bank bonds |       | 971,670   |          | 20.3       |       | 868,676    |          | 16.4       |       |
| Others                                                |       | 149,284   |          | 3.1        |       | 49,372     |          | 0.9        |       |
| **Total**                                             | ** ** | **$**     | **4,790,090** | ** ** | **100**    | ** ** | **5,308,811** | ** ** | **100**    | ** ** |
|                                                       |            |           |               |            |            |            |               |            |            |  |

 

F-29

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **18** | **Retirement  benefits to employees*****(Continued)*** |
|--------|--------------------------------------------------------|

 
| 18.1.6 | Net  periodic gratuity cost included the following components: |
|--------|----------------------------------------------------------------|

 
| **Year ended December 31,** | ** ** | **2004**   | ** **  | **2005**   | ** ** | **2006**      | ** ** |
|--------------------------------------------|------------|------------|-------------|------------|------------|---------------|------------|
| ** **                                 | ** ** | ** ** | ** **  | ** ** | ** ** | ** **    | ** ** |
| Service cost                               |       | $          | 633,771     |       | $          | 919,286       |       | $ | 982,652 |   |
| Interest cost                              |       | 190,714    |        | 302,722    |       | 329,613       |       |
| Expected return  on assets                 |       | (179,505   | )           | (276,826   | )          | (378,065      | )          |
| Amortization                               |       | 49,607     |        | 99,371     |       | 41,284        |       |
|                                       |       |       |        |       |       |          |       |
| **Net  gratuity cost**                     | ** ** | **$**      | **694,587** | ** ** | **$**      | **1,044,553** | ** ** | **$** | **975,484** | ** ** |

 
| 18.1.7 | Key  weighted average assumptions used to determine the net periodic gratuity cost  were as follows: |
|--------|------------------------------------------------------------------------------------------------------|

 
| ** **                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate              |       | 7.0      | %          | 7.5      | %          | 8.00     | %          |
| Expected return  on assets |       | 6.5      | %          | 7.5      | %          | 7.50     | %          |

 
|   | For  the actuarial valuation at December 31, 2006, compensation levels have  been assumed to increase at  15% per  annum for the first year, 12.5% per annum for the next 3  years and 7% per annum thereafter. For  determining the net periodic cost for the year ended December 31, 2005,  compensation levels have been assumed to increase at 15% per annum for the  first year, 12.5% per annum for the next year, 10% per annum for next five  years and 7% per annum thereafter. For the year ended December 2004,  compensation levels have been assumed to increase at 15% per annum for the  first two years, 10% per annum for next 3 years and 7% per annum thereafter. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 18.1.8 | Patni’s  expected contribution to gratuity fund for the calendar year 2007 is $ 227,297. The expected benefit payments for next ten years are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 
| ** **                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012-2016** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------|------------|
| Expected benefit  payments |       | $        | 446,783    |     | $          | 512,531  |       | $        | 665,026    |     | $          | 893,046       |       | $ | 1,119,576 |   | $ | 5,451,321 |   |
|                            |            |          |            |          |            |          |            |          |            |          |            |               |            |  |  |  |  |  |  |

 
|    | ***Pension benefits***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 18.1.9  | Certain  directors of Patni in employment with Patni India and Patni USA are entitled  to receive pension benefits upon retirement or on termination from employment  at the rate of 50% of their last drawn monthly salary. The pension is payable  from the time the eligible director reaches the age of sixty five and is  payable to the directors or the surviving spouse. The liabilities for these  pension plans are actuarially determined and periodically recognised. These  plans are not funded. |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 18.1.10 | With  regard to Patni India pension plans, the following table sets forth the plan’s  funded status and amounts recognised in the Company’s consolidated balance  sheet. Measurement dates used to measure benefit obligation is December 31  for each fiscal year.                                                                                                                                                                                                                             |

 
| **At December 31,**                                          | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Change  in benefit obligation**                                      |       |       |       |       |       |
| PBO at  January 1,                                                |       | $          | 1,778,033  |       | $          | 1,868,072 |   |
| Service cost                                                           |       | 52,950     |       | 66,718     |       |
| Interest cost                                                          |       | 131,830    |       | 148,860    |       |
| Translation  loss/(gain)                                               |       | (61,504    | )          | 37,573     |       |
| Actuarial  loss/(gain)                                                 |       | (33,237    | )          | (211,921   | )          |
| PBO at  December 31,                                              |       | 1,868,072  |       | 1,909,302  |       |
| Funded status                                                          |       | (1,868,072 | )          | (1,909,302 | )          |
| Unrecognized  actuarial loss                                           |       | 137,098    |       | —     |       |
| Net amount  recognized                                                 |       | (1,730,974 | )          | (1,909,302 | )          |
| Amount  recognized in the consolidated balance sheets are as follows:  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued benefit  liability (included in ‘Other liabilities’) |       | 1,730,974  |       | (1,909,302 | )          |
| Net amount recognized                                                  |       | 1,730,974  |       | (1,909,302 | )          |
| Accumulated  benefit obligation                                        |       | $          | 1,181,118  |       | $          | 1,327,907 |   |

 

F-30

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **18** | **Retirement  benefits to employees*****(Continued)*** |
|--------|--------------------------------------------------------|

 
| 18.1.11 | Key  weighted average assumptions used to determine benefit obligation for Patni  India pension plan were as follows: |
|---------|-----------------------------------------------------------------------------------------------------------------------|

 
| ** **                       | ** ** | **2005**      | ** ** | **2006**        | ** ** |
|----------------------------------|------------|---------------|------------|-----------------|------------|
| Discount rate                    |       | 8% per annum  |       | 8.85% per annum |       |
| Increase in  compensation levels |       | 10% per annum |       | 10% per annum   |       |

 
| 18.1.12 | Net  periodic pension cost of Patni India pension plan included the following  components: |
|---------|--------------------------------------------------------------------------------------------|

 
| **Year ended December 31,** | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                               |       | $          | 63,594     |       | $          | 52,950     |       | $ | 66,718 |   |
| Interest cost                              |       | 115,255    |       | 131,830    |       | 148,860    |       |
| Amortization                               |       | 304,885    |       | 137,066    |       | —     |       |
| ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net pension cost                           |       | $          | 483,734    |       | $          | 321,846    |       | $ | 215,578 |   |

 
| 18.1.13 | Key  weighted average assumptions used to determine net periodic pension cost for  the Patni India pension plan were as follows: |
|---------|----------------------------------------------------------------------------------------------------------------------------------|

 
| **Year ended December 31,** | ** ** | **2004**       | ** ** | **2005**       | ** ** | **2006**      | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| Discount rate                              |       | 7.0% per annum |       | 7.5% per annum |       | 8% per annum  |       |
| Rate of  compensation increase             |       | 10% per annum  |       | 10% per annum  |       | 10% per annum |       |

 
| 18.1.14 | With  regard to Patni USA pension plan, the following table sets forth the plan’s  funded status and amounts recognised in the Company’s consolidated balance  sheet. Measurement dates used to make up benefit obligation is December 31  for each fiscal year. |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **At December 31,**                                          | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Change  in benefit obligation**                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| PBO at  January 1,                                                |       | $          | 4,739,647  |       | $          | 5,716,530 |   |
| Service cost                                                           |       | 117,766    |       | 171,332    |       |
| Interest cost                                                          |       | 234,240    |       | 284,566    |       |
| Translation  loss/(gain)                                               |       | (187,253   | )          | 110,751    |       |
| Actuarial loss/  (Gain)                                                |       | 812,130    |       | (211,425   | )          |
| PBO at December 31,                                               |       | 5,716,530  |       | 6,071,754  |       |
| Funded status                                                          |       | (5,716,530 | )          | (6,071,754 | )          |
| Unrecognized  actuarial loss                                           |       | 1,162,636  |       | —     |       |
| Net amount  recognized                                                 |       | (4,553,894 | )          | (6,071,754 | )          |
| Amount  recognized in the consolidated balance sheets are as follows:  |       |       |       |       |       |
| Accrued benefit  liability (included in ‘Other liabilities’) |       | 4,553,894  |       | 6,071,754  |       |
| Net amount  recognized                                                 |       | 4,553,894  |       | 6,071,754  |       |
| Accumulated  benefit obligation                                        |       | $          | 4,294,919  |       | $          | 4,147,099 |   |

 
| 18.1.15 | Key weighted average  assumptions used to determine benefit obligation for Patni USA pension plan  were as follows: |
|---------|---------------------------------------------------------------------------------------------------------------------|

 
| ** **                       | ** ** | **2005**      | ** ** | **2006**      | ** ** |
|----------------------------------|------------|---------------|------------|---------------|------------|
| Discount rate                    |       | 5% per annum  |       | 5% per annum  |       |
| Increase in  compensation levels |       | 10% per annum |       | 10% per annum |       |

 

F-31

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **18** | **Retirement  benefits to employees*****(Continued)*** |
|--------|--------------------------------------------------------|

 
| 18.1.16 | Net  periodic pension cost of Patni USA pension plan included the following  components: |
|---------|------------------------------------------------------------------------------------------|

 
| **Year ended December 31,** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006**  | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Service cost                               |       | $        | 139,182    |     | $          | 117,766   |       | $ | 171,332 |   |
| Interest cost                              |       | 217,259  |       | 234,240  |       | 284,566   |       |
| Amortization                               |       | 948,731  |       | 713,714  |       | 196,139   |       |
|                                       |       |     |       |     |       |      |       |
| Net pension cost                           |       | $        | 1,305,172  |     | $          | 1,065,720 |       | $ | 652,037 |   |

 
| 18.1.17 | Key  weighted average assumptions used to determine net periodic pension cost for  the Patni USA pension plan were as follows: |
|---------|--------------------------------------------------------------------------------------------------------------------------------|

 
| **Year ended December 31,** | ** ** | **2004**       | ** ** | **2005**       | ** ** | **2006**      | ** ** |
|--------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                 | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
| Discount rate                              |       | 5.0% per annum |       | 5.0% per annum |       | 5% per annum  |       |
| Rate of compensation  increase             |       | 10% per annum  |       | 10% per annum  |       | 10% per annum |       |

 
| 18.1.18 | As  discussed in Note 2.1.26, effective December 31, 2006, the Company  adopted the recognition and disclosure provisions of SFAS No. 158. The  adoption of SFAS No. 158, had no effect on the Company’s net income,  however it was effected via a gross charge to accumulated other comprehensive  income of $1,166,734, net of related deferred income tax of $323,655. The  effect of applying this statement on individual line items presented in the December 31,  2006 Balance Sheet is as follows: |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **                              | ** ** | **Before   application of  SFAS 158** | ** ** | **Adjustments** | ** ** | **After application  of SFAS 158** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------|------------|---------------------------------------------------|------------|
|                                    |       |                                                 |       |            |       |                                              |       |
| Other assets                            |       | 11,944,215                                           |       | (486,990        | )          | 11,457,225                                        |       |
| Deferred income  taxes non current      |       | 62,044                                               |       | 308,485         |       | 370,529                                           |       |
| **Total  assets**                       | ** ** | **640,519,156**                                      | ** ** | **(178,505**    | **)**      | **640,340,651**                                   | ** ** |
| Other current  liabilities              |       | 38,222,059                                           |       | (313            | )          | 38,221,746                                        |       |
| Total current  liabilities              |       | 119,488,396                                          |       | (313            | )          | 119,488,083                                       |       |
| Deferred income  taxes non current      |       | 3,759,809                                            |       | (15,170         | )          | 3,744,639                                         |       |
| Other liabilities                       |       | 7,444,003                                            |       | 680,057         |       | 8,124,060                                         |       |
| **Total  liabilities**                  | ** ** | **131,082,861**                                      | ** ** | **664,574**     | ** ** | **131,747,435**                                   | ** ** |
| Accumulated  Other Comprehensive Income |       | 15,084,795                                           |       | (843,079        | )          | 14,241,716                                        |       |
| **Total  Shareholders’ Equity**    | ** ** | **509,436,295**                                      | ** ** | **(843,079**    | **)**      | **508,593,216**                                   | ** ** |

 
|       | The estimated net loss  for the defined benefit gratuity and pension plans that will be amortized  from accumulated other comprehensive income into net periodic benefit cost  over the next fiscal year is $41,002.                                                                                                                                                                                                                                 |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 18.1.19    | As  the assumed rates for the above defined benefit plans have a significant  effect on the amounts reported, the management has assessed these rates as  comparable with prevalent industry standards and its projected long-term  plans of growth.                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | ***Provident fund***                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 18.1.20    | All  employees of Patni and Patni Telecom India receive provident fund benefits  through a defined contribution plan in which both the employee and employer  make monthly contributions to the plan at 12% each of the covered employee’s  defined portion of salary. The Company has no further obligations under the  plan beyond monthly contribution. Patni contributes to the Provident Fund  Plan maintained by the Government of India. |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 18.1.21    | Patni  contributed $1,765,281, $2,613,644 and $3,895,116 to the Provident Fund Plan  in 2004, 2005 and 2006 respectively.                                                                                                                                                                                                                                                                                                                            |

 

F-32

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 
| **19**     | **Segment Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 19.1.1     | *SFAS No. 131, “Disclosures about Segments of an  Enterprise and Related Information”*, establishes standards for the way enterprises report information  about operating segments and related disclosures about products and services,  geographic areas and major customers.   The Company’s operations relate to providing IT services and  solutions, delivered to customers operating in various industry  segments.  Accordingly, revenues  represented along industry classes comprise the principal basis of segmental  information set out in these consolidated financial statements.  Secondary segmental reporting is performed  on the basis of the geographical location of the customers.  The accounting policies consistently used  in the preparation of the consolidated financial statements are also  consistently applied to individual segment information, and are set out in  the summary of significant accounting policies.  |
|       | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 19.1.2     | Industry  segments of the Company comprise financial services, insurance services,  manufacturing companies, telecommunications, technology services (comprising  independent software vendors and product engineering) and others such as  energy and utilities, retail, logistics and transportation and media and  entertainment.  The Company evaluates  segment performance and allocates resources based on revenue growth. Revenue  in relation to segments is categorized based on items that are individually  identifiable to that segment. Costs are not specifically allocable to  individual segment as the underlying resources and services are used  interchangeably. Fixed assets used in the Company’s business or liabilities  contracted have not been identified to any of the reportable segments, as the  fixed assets and their services are used interchangeably between segments.                                                                                |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 19.1.3     | Patni’s  geographic segmentation is based on location of customers and comprises  United States of America (‘USA’), Europe, Japan, India and Others. Revenue in  relation to geographic segments is categorized based on the location of the  specific customer entity for which services are performed irrespective of the  customer entity that is billed for the services and whether the services are  delivered onsite or offshore. Categorization of customer related assets and  liabilities in relation to geographic segments is based on the location of  the specific customer entity which is billed for the services. Substantial  portion of Patni’s long lived assets are located in India.                                                                                                                                                                                                                                                                       |

 

F-33

----

 

**PatniComputer Systems Limited and subsidiaries**

 

**Notesto the consolidated financial statements (Continued)**

 

**19.1.3****                  ****Industry segments**

 
| **Particulars**                                                             | ** ** | **Financial  services**     | ** ** | **Insurance** | ** ** | **Manufacturing** | ** ** | **Telecom** | ** **  | **Independent   Software  Vendor** | ** ** | **Product  Engineering** | ** ** | **Others** | ** ** | **Total**       | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------|------------|-------------------|------------|-------------|-------------|------------------------------------|------------|--------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                                  | ** ** | **December 31,  2004** | ** ** |
| Revenues                                                                    |       | $                           | 62,707,961 |          | $          | 107,001,559       |       | $           | 92,417,807  |                               | $          | 8,491,468                |       | $          | 19,344,147 |            | $          | 15,110,938 |   | $ | 21,507,744 | ** ** | **$** | **326,581,624** | ** ** |
| Accounts receivables, net                                                   |       | 8,689,913                   |       | 19,223,898    |       | 24,818,665        |       | 6,198,845   |        | 3,662,373                          |       | 3,348,753                |       | 6,062,466  | ** ** | **72,004,913**  | ** ** |
| Billings in  excess of cost and estimated earnings on uncompleted contracts |       | (55,182                     | )          | (946,385      | )          | (831,123          | )          | (99,408     | )           | (27,576                            | )          | (477,791                 | )          | (408,881   | )          | **(2,846,346**  | **)**      |
| Advance from customers                                                      |       | —                      |       | (66,734       | )          | (21,605           | )          | —      |        | (47,130                            | )          | —                   |       | (2,570     | )          | **(138,039**    | **)**      |
| Cost and  estimated earnings in excess of billings on uncompleted contracts |       | 2,014,083                   |       | 1,202,844     |       | 4,553,774         |       | 1,992,678   |        | 2,062,245                          |       | 1,768,014                |       | 1,639,802  |       | **15,233,440**  | ** ** |
|                                                                        |       |                        |       |          |       |              |       |        |        |                               |       |                     |       |       | ** ** | ** **      | ** ** |
| ** **                                                                  | ** ** | **December 31,  2005** | ** ** |
| Revenues                                                                    |       | $                           | 72,185,157 |          | $          | 124,885,014       |       | $           | 98,655,217  |                               | $          | 68,860,317               |       | $          | 22,514,511 |            | $          | 33,923,596 |   | $ | 29,308,120 | ** ** | **$** | **450,331,932** | ** ** |
| Accounts receivables, net                                                   |       | 13,627,715                  |       | 16,468,689    |       | 17,230,008        |       | 9,089,355   |        | 3,739,578                          |       | 7,606,416                |       | 6,659,400  | ** ** | **74,421,161**  | ** ** |
| Billings in  excess of cost and estimated earnings on uncompleted contracts |       | (188,409                    | )          | (383,407      | )          | (758,503          | )          | (451,553    | )           | (69,075                            | )          | (208,069                 | )          | (291,330   | )          | **(2,350,346**  | **)**      |
| Advance from customers                                                      |       | (1,208,504                  | )          | (94,910       | )          | (71,927           | )          | —      |        | (1,688                             | )          | —                   |       | (12,928    | )          | **(1,389,957**  | **)**      |
| Cost and  estimated earnings in excess of billings on uncompleted contracts |       | 2,577,862                   |       | 5,148,267     |       | 3,553,636         |       | 9,163,047   |        | 1,624,411                          |       | 3,007,721                |       | 1,019,150  |       | **26,094,094**  | ** ** |
|                                                                        |       |                        |       |          |       |              |       |        |        |                               |       |                     |       |       | ** ** | ** **      | ** ** |
| ** **                                                                  | ** ** | **December 31,  2006** | ** ** |
| Revenues                                                                    |       | $                           | 88,360,525 |          | $          | 134,513,555       |       | $           | 125,395,979 |                               | $          | 109,204,32               |       | $          | 23,828,82  |            | $          | 58,628,980 |   | $ | 38,918,599 | ** ** | **$** | **578,850,882** | ** ** |
| Accounts receivables, net                                                   |       | 16,469,861                  |       | 21,301,154    |       | 26,507,789        |       | 22,694,977  |        | 4,463,335                          |       | 12,464,424               |       | 11,716,964 | ** ** | **115,618,504** | ** ** |
| Billings in  excess of cost and estimated earnings on uncompleted contracts |       | (207,662                    | )          | (211,665      | )          | (727,686          | )          | (489,852    | )           | (12,209                            | )          | (806,075                 | )          | (869,432   | )          | **(3,324,581**  | **)**      |
| Advance from customers                                                      |       | (4,833                      | )          | (18,172       | )          | (121,713          | )          | —      |        | (27,354                            | )          | (11,367                  | )          | (2,529     | )          | **(185,968**    | **)**      |
| Cost and  estimated earnings in excess of billings on uncompleted contracts |       | 2,425,124                   |       | 1,017,735     |       | 4,756,834         |       | 10,414,219  |        | 989,333                            |       | 456,626                  |       | 1,774,474  |       | **22,834,345**  | ** ** |

 

F-34

----

 
| **Patni Computer Systems Limited  and subsidiaries**            |                                                                        |
|-----------------------------------------------------------------|-----------------------------------------------------------------------------|
| ** **                                                      | *** ***                                                                | ** ** |   |
| **Notes to the consolidated  financial statements (Continued)** |                                                                        |
| ** **                                                      | *** ***                                                                | ** ** |   |
| **19**                                                          | *** ***                                                                | **Segment  Information*****(Continued)*** |   |
| ** **                                                      | *** ***                                                                | ** ** |   |
| **19.1.3**                                                      | *** ***                                                                | ***Geographic segments*** |   |
| ** **                                                      | *** ***                                                                | *** *** |   |
|                                                            | **Particulars**                                                             | ** ** | **USA** | ** ** | **Europe** | ** ** | **Japan** | ** ** | **India** | ** ** | **Others** | ** ** | **Total** | ** ** |
|                                                            | ** **                                                                  | ** ** | **December 31, 2004** | ** ** |
|                                                            | Revenues                                                                    |   | $ | 286,720,168 |   | $ | 25,690,385 |   | $ | 11,029,442 |   | $ | 726,011 |   | $ | 2,415,618 | ** ** | **$** | **326,581,624** | ** ** |
|                                                            | Accounts  receivables, net                                                  |   | 62,053,958 |   | 8,433,786 |   | 366,978 |   | 132,587 |   | 1,017,604 | ** ** | **72,004,913** | ** ** |
|                                                            | Billings in  excess of cost and estimated earnings on uncompleted contracts |   | (2,806,346 | ) | (28,339 | ) | (2,813 | ) | (8,848 | ) | — | ** ** | **(2,846,346** | **)** |
|                                                            | Advance from  customers                                                     |   | — |   | (132,431 | ) | — |   | (5,608 | ) | — | ** ** | **(138,039** | **)** |
|                                                            | Cost and  estimated earnings in excess of billings on uncompleted contracts |   | 10,463,077 |   | 2,245,047 |   | 2,205,617 |   | 84,647 |   | 235,052 | ** ** | **15,233,440** | ** ** |
|                                                            |                                                                        |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
|                                                            | ** **                                                                  | ** ** | **December 31,  2005** | ** ** |
|                                                            | Revenues                                                                    |   | $ | 381,887,038 |   | $ | 41,055,863 |   | $ | 19,362,908 |   | $ | 1,442,292 |   | $ | 6,583,831 | ** ** | **$** | **450,331,932** | ** ** |
|                                                            | Accounts  receivables, net                                                  |   | 59,329,356 |   | 11,315,359 |   | 2,204,954 |   | 167,705 |   | 1,403,787 | ** ** | **74,421,161** | ** ** |
|                                                            | Billings in  excess of cost and estimated earnings on uncompleted contracts |   | (1,456,655 | ) | (731,554 | ) | (162,137 | ) | — |   | — | ** ** | **(2,350,346** | **)** |
|                                                            | Advance from  customers                                                     |   | (1,333,823 | ) | — |   | — |   | (2,021 | ) | (54,113 | **)** | **(1,389,957** | **)** |
|                                                            | Cost and  estimated earnings in excess of billings on uncompleted contracts |   | 20,216,375 |   | 2,424,521 |   | 2,846,253 |   | 149,507 |   | 457,438 | ** ** | **26,094,094** | ** ** |
|                                                            |                                                                        |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** | ** ** |
|                                                            | ** **                                                                  | ** ** | **December 31,  2006** | ** ** |
|                                                            | Revenues                                                                    |   | $ | 467,907,248 |   | $ | 67,281,267 |   | $ | 21,827,569 |   | $ | 2,367,695 |   | 19,467,103 | ** ** | **$** | **578,850,882** | ** ** |
|                                                            | Accounts  receivables, net                                                  |   | 84,143,450 |   | 24,949,728 |   | 3,441,415 |   | 1,562,956 |   | 1,520,955 | ** ** | **115,618,504** | ** ** |
|                                                            | Billings in  excess of cost and estimated earnings on uncompleted contracts |   | (1,658,212 | ) | (914,024 | ) | (675,485 | ) | (60,767 | ) | (16,093 | **)** | **(3,324,581** | **)** |
|                                                            | Advance from  customers                                                     |   | (132,511 | ) | (20,580 | ) | (3,367 | ) | (3,356 | ) | (26,154 | **)** | **(185,968** | **)** |
|                                                            | Cost and  estimated earnings in excess of billings on uncompleted contracts |   | 11,488,904 |   | 8,518,364 |   | 1,348,568 |   | 172,637 |   | 1,305,872 | ** ** | **22,834,345** | ** ** |
|                                                            |                                                                        |   |
| 19.1.4                                                          |                                                                        | One customer accounted for 32%, 22% and 15% of the  total revenues for the year ended December 31, 2004, 2005 and 2006  respectively. Net receivables from this customer as at December 31, 2005  and 2006 amounted to 21% and 12% of the total net receivables respectively.  The revenues from this customer were across all the industry segments of the  Company. Another customer in the Insurance industry segment accounted for  15%, 12% and 10% of the total revenues for the years ended December 31,  2004, 2005 and 2006 respectively. Net receivables for this customer as at December 31,  2005 and 2006 amounted to Nil and 4% of the total net receivables  respectively. |
|                                                            |                                                                        |   |
| **20**                                                          |                                                                        | **Foreign exchange (gain)/loss** |
| ** **                                                      |                                                                        | ** ** |
| ** **                                                      |                                                                        | Aggregate foreign  exchange (gain)/loss for the years ended December 31, 2004, 2005 and  2006 amounted to $2,081,800, $4,218,141 and $3,456,706 respectively. Foreign  exchange loss amounting to $Nil, $2,524,996 and $708,780 for the years ended December 31,  2004, 2005 and 2006 respectively, have been included in “Other  (expense)/income, net” in the consolidated statements of income.

  |
|                                                                 |                                                                             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-35

----

 
| **Patni Computer Systems Limited and subsidiaries**            |
|----------------------------------------------------------------|
| ** **                                                     |   | ** ** |
| **Notes to the consolidated financial statements (Continued)** |
| ** **                                                     |   | ** ** |
| **21**                                                         |   | **Earnings per share** |
| ** **                                                     |   | ** ** |
| ** **                                                     |   | A reconciliation of the common shares used in the computation of  basic and diluted earnings per share is set out below: |
| ** **                                                     |   |   |
|                                                           | **Years  ended December 31,** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                           | **Common shares** | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                                           | Weighted average number of shares outstanding | ** ** | 123,066,042 | ** ** | 125,736,592 | ** ** | 137,957,477 | ** ** |
|                                                           | Effect of dilutive equivalent shares-stock options  outstanding | ** ** | 1,018,950 | ** ** | 1,721,040 | ** ** | 947,383 | ** ** |
|                                                           | Weighted average number of equity shares and  dilutive equivalent shares outstanding | ** ** | 124,084,992 | ** ** | 127,457,632 | ** ** | 138,904,860 | ** ** |
|                                                           |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                     |   | Options to purchase  Nil, Nil and 2,630,860 equity shares were outstanding during the year ended December 31,  2004, 2005 and 2006, respectively, but were not included in the computation  of diluted earnings per share because the exercise price of the options was  greater than the average market price of the equity shares. |
| ** **                                                     |   |   |
| **22**                                                         |   | **Related party transactions** |
| ** **                                                     |   | ** ** |
| 22.1.1                                                         |   | Patni has various transactions with related parties, such as PCS  Technology Ltd. (‘PCSTL’), formerly known as PCS Industries Ltd., PCS  Cullinet, PCS Finance, Ashoka Computers - all affiliates, various companies  of the GE group (‘GE’) which is a significant shareholder in Patni, directors  of Patni and their relatives. Such transactions were consummated on terms  equivalent to those that prevail in arm’s-length transactions. |
|                                                           |   |   |
|                                                           |   | *Revenues* |
|                                                           |   | * * |
| 22.1.2                                                         |   | Patni USA sells computer hardware to PCSTL. Such sales during the  years ended December 31, 2004, 2005 and 2006 amounted to $8,974, $Nil  and $Nil respectively. |
|                                                           |   |   |
| ** **                                                     |   | *Expenses* |
| ** **                                                     |   | * * |
| 22.1.3                                                         |   | Patni has taken certain residential properties under operating leases  from certain affiliates and the Patni family.   The rentals and other incidental charges incurred for the same  were  $289,964, $266,325 and $ 127,748  for the years ended December 31, 2004, 2005 and 2006 respectively.  Amounts payable with respect to these obligations as at December 31,  2005 and 2006 were $18,150 and $ 14,495 respectively. Outstanding security  deposits under the operating leases placed by Patni with affiliates and the  Patni family at December 31, 2005 and   2006 were $251,569 and $ 107,203 respectively. |
|                                                           |   |   |
| 22.1.4                                                         |   | Patni has given donations to a public charitable trusts, the trustees  of which include a director of the Company and his relatives. The donations  paid during the years ended 2004, 2005 and 2006 were $55,199, $56,699 and  $Nil respectively. |
|                                                           |   |   |
|                                                           |   | *Due from employees* |
|                                                           |   | * * |
| 22.1.5                                                         |   | Patni grants personal loans to eligible employees, either for housing  or personal purposes.  Personal loans  include loans for vehicle purchase and other individual employee needs.  Such loans are repayable in equal  installments over periods ranging from 6–60 months. Interest on these loans  is charged at 7.5%–9%. Loans outstanding at December 31, 2005 and 2006  were 56,662 and $ 267,328 respectively. |
|                                                           |   |   |
| 22.1.6                                                         |   | Patni USA, Patni UK, Patni GmbH, Patni Telecom and its subsidiaries  grant personal loans to employees as well as advances to meet initial  conveyance and living expenses. Such loans and advances are repayable over  periods ranging up to 60 months and 6 months respectively. Interest charged  on these loans and advances ranged from 0% to 10%.  Balance outstanding of such loans and  advances at December 31, 2005 and 2006 were $1,252,682 and $ 2,427,797  respectively. |
|                                                           |   |   |
|                                                           |   | Employees execute promissory notes for the amount advanced along with  a guarantor’s agreement as collateral. In the case of long term housing loan,  the original house deed is sought to be deposited with the Company as  collateral, in addition to the guarantor’s agreement. |
|                                                                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-36

----

 
| **Patni  Computer Systems Limited and subsidiaries**            |
|-----------------------------------------------------------------|
|                                                            |   |   |
| **Notes  to the consolidated financial statements (Continued)** |
|                                                            |   | ** ** |
| **22**                                                          |   | **Related party transactions*****(Continued)*** |
|                                                            |   | ** ** |
|                                                            |   | *Transactions with General Electric (“GE”)* |
|                                                            |   | * * |
| 22.1.7                                                          |   | Patni  USA, Patni UK and Patni GmbH sell software services to various companies of  the GE group.  Sales to GE during the  years ended December 31, 2004, 2005 and 2006 amounted to $103,440,511,  $99,359,172 and $84,403,156 respectively. This amounts to 32%, 22% and 15% of  the total revenue for the years ended December 31, 2004, 2005 and 2006  respectively.  Net receivables from  various GE companies as at December 31, 2005 and 2006 amounted to  $15,673,490 and $13,724,670 respectively. This amounted to 21% and 12% of the  total net receivables as at December 31, 2005 and 2006 respectively. |
|                                                            |   |   |
| 22.1.8                                                          |   | GE  charges Patni and Patni USA for data link connections.  Data link charges for the years ended  December 31, 2004, 2005 and 2006  amounted to $1,165,610, $933,475 and $991,277 respectively. Amount payable to  GE at December 31, 2005 and 2006 on account of data link charges  amounted to $229,728 and $116,873 respectively. |
|                                                            |   |   |
|                                                            |   | *Transactions with secondary shareholders* |
|                                                            |   | * * |
| 22.1.9                                                          |   | During  the year ended December 31, 2004, the Company incurred $1,021,096 as IPO  related expenses on behalf of the secondary shareholders. During the year  ended December 31,2005, the Company paid $491,965 for IPO related  expenses on behalf of the secondary shareholders. The secondary shareholders  have reimbursed the Company for such amount in 2006. |
|                                                            |   |   |
| **23**                                                          |   | **Line of Credit** |
| ** **                                                      |   | ** ** |
| ** **                                                      |   | The  Company has a Line of Credit of Rs.140,000,000 ($3,160,984) as of December 31,  2006 from its bankers for export credit requirements such as Packing Credit,  Export Bill Discounting or Post Shipment Loan which have a maximum tenor of  180 days which can be rolled forward. This includes an inner limit of  Rs.40,000,000 ($903,138) for working capital requirements such as Overdraft  or Working Capital Demand Loan, which has a repayment period of 365 days for  loans and 1 day for Overdraft. The Company also has a limit for issuance of  Bonds and Guarantees of Rs.70,000,000 ($1,580,492) for financial guarantees  favoring the Government of India and other authorities which have a repayment  period of 36 months (including claim period). This limit is interchangeable  with Letters of Credit, which have a repayment period of 365 days. The line  of credit bears interest as negotiated with the bank from time to time. The  facilities are secured by accounts receivables of the company and contain  financial covenants and restrictions on indebtedness.  The Company has not availed these  facilities as of December 31, 2006. |
| ** **                                                      |   |   |
| **24**                                                          |   | **Commitments and Contingencies** |
| ** **                                                      |   | ** ** |
| 24.1.1                                                          |   | The  Company is obliged under a number of contracts relating to capital  expenditure. Estimated amounts remaining to be executed on such contracts  (net of advances), aggregated $22,427,362 and $31,907,505 at December 31,  2005 and 2006 respectively. |
|                                                            |   |   |
| 24.1.2                                                          |   | Guarantees  given by a bank on behalf of Patni amounted $399,630 and $1,204,985 as at December 31,  2005 and 2006 respectively and letter of credit issued by bank was $547,414  and $Nil as at December 31, 2005 and 2006 respectively. |

 

F-37

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| **Patni  Computer Systems Limited and subsidiaries**            |
|-----------------------------------------------------------------|
| ** **                                                      |   | ** ** |
| **Notes  to the consolidated financial statements (Continued)** |
| ** **                                                      |   | ** ** |
| **24**                                                          |   | **Commitments and Contingencies*****(Continued)*** |
| ** **                                                      |   | ** ** |
| 24.1.3                                                          |   | In  December 2006, the Company received a demand from the Indian Income Tax  department of approximately $14,228,042 including interest demand of  approximately $4,218,785 for the assessment year 2004-05. The tax demand is  mainly on account of disallowance of deduction claimed by the Company under Section 10A  of the Income Tax Act, 1961, in respect of profits earned by its various  eligible undertakings. In January 2007, the management of the Company  has filed an appeal, within the time available under the Income Tax Act,  challenging the disallowance. Considering the facts and nature of  disallowances and based on the advice given by the Company’s legal counsel,  the management believes that the disallowance is not tenable, is confident of  a favourable outcome in appeal proceedings and hence no provision for such  income tax demand is considered necessary. |
|                                                            |   |   |
|                                                            |   | Certain  other income tax related legal proceedings   are pending against the Company. Potential liabilities, if any, have  been adequately provided for, and the Company does not currently estimate any  incremental liability in respect of these proceedings. Additionally, the  Company is also involved in lawsuits and claims which arise in ordinary  course of business. There are no such matters pending that Patni expects to  be material in relation to its business. |
|                                                            |   |   |
| 24.1.4                                                          |   | The  Company is currently under review by the US Department of Labor with respect  to compliance matters on past and present international labor practices. The  Company has estimated and provided the liability $1,962,362 during the year  ended December 31, 2006 for the years 2004 and 2005. |
|                                                            |   |   |
| **25**                                                          |   | **Fair value of financial instruments** |
| ** **                                                      |   | ** ** |
|                                                            |   | The  fair value of Patni’s current assets and current liabilities approximate  their carrying values because of their short-term maturity.  Such financial instruments are classified  as current and are expected to be liquidated within the next twelve  months.  The fair value of capital  lease obligations has been estimated by discounting cash flows based on  current rate available to the Company for similar types of borrowing  arrangements.  The fair value and  carrying value of capital lease obligations is set out below: |
|                                                            |   |   |
|                                                            | **Capital lease obligations** | ** ** | **Fair Value** | ** ** | **Carrying value** | ** ** |
|                                                            | At  December 31, 2005 |   | $ | 668,283 |   | $ | 705,863 |   |
|                                                            | At  December 31, 2006 |   | $ | 655,088 |   | $ | 691,791 |   |
|                                                                 |  |  |  |  |  |  |  |  |  |  |

 

F-38

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